The economic calendar is a fantastic tool to understand what is going on in the markets, but how do you take advantage of it to make more profitable trades? Here are 3 strategies you can use to make winning trades using the economic calendar.
Most traders understand how economic news affects nearly all the trading markets in one way or another. Using data released by the variety of government and private sources on the state of the local, national, and global economies empowers traders to make informed decisions.
However, many traders aren’t exactly sure how to transform their knowledge into making better profits on their positions. If you’re not familiar with the economic calendar or its functions, check out our informative guide. Fortunately, Olymp Trade clients get free access to a customizable economic calendar.
Here are 3 proven strategies on using the Economic Calendar to make more money.
Trade the Most Liquid Markets with Non-Directional Bias
The markets with the most liquidity are those that are traded the most often and with the most volume. The major indices like the Dow Jones, NASDAQ, S&P 500 are good examples, but also the major currency pairs like EUR/USD, GBP/USD, USD/JPY, USD/CAD, AUD/USD, and USD/CHF.
You’ll notice that all of these markets involve the U.S. dollar. The reason for this is that the U.S. dollar is the “reserve currency” for most of the world. The U.S. is also the largest economy in the world, but that isn’t the real point.
The key is that these markets have the tightest spreads typically. When news or reports are released that affect these markets, the reaction in the marketplace is more pronounced, which provides more possibilities to profit of the action.
Key data releases like U.S. unemployment, GDP, U.S. Federal Reserve (Central Bank) decisions, wars, disasters, etc. are going to adversely affect these markets most significantly in terms of movement outside their norms.
Fresh trends are often started on the release of news based on the economic calendar, even if these trends are only for a short period of time. Therefore, traders have an opportunity to grab a ride on the new trend and exit profitably shortly thereafter.
The key is keeping up to date on new economic data and news stories so that you are ready to go when the time comes and take advantage.
Straddling the Market
Straddling the market is another non-directional strategy that lets traders set up positions in certain markets ahead of time based on data that is to be released off the economic calendar.
In this situation, a trader looks at the time and date for key data to be released and then studies the charts of the affected assets to determine their typical trading price channels. The closer to the actual release of the news, the more accurate the price ranges will be.
Let’s review a fictional example of how this is done. The U.S. Federal Reserve is due to release its decision on whether to lower interest rates or not. Most people agree that they are going to actually lower them, but some people have questioned the reasoning behind such a decision.
We don’t know exactly what they will do and how the market will react. So, we look at which markets will be affected by such a decision. These would be USD currency pairs, the major U.S. indices, etc.
For our example, let’s look at the Dow Jones Industrial Average and see how we would set up our “straddle”. In this 15 minute chart, our 10 period EMA is staying in the range of 27932 and 27940.
With the current price at 27936.5 and our news about to be released, we would set our short term targets at the green lines (27932 and 27940). We set a Buy position at the upper end (27940) and a Sell position at the lower end (27932) and our Stop Loss point at 5% for Forex plays.
If the price goes one way or the other, we have a position in play either way that will trigger with the movement following the announcement. In the best case scenario, only one of our entry points gets triggered and we can cancel the other, but don’t be too quick with cancelling.
Additionally, we can set up longer term straddles that are further outside the current price. Just extend the range by another 4 to 6 points and set up more positions. In this way, you can layer your entry points to maximize profit while minimizing any losses for a sudden reversal.
Here is an example of layering your entry positions based on the same chart where we added entry points out to 8 and 12 from our original level. Once the market makes a move, your positions will trigger and you will only need to decide when you want to exit.
Trying to do a straddle in real time after the news is released can often lead to missing good entry points as well as it allows emotions to come into play at a crucial time, which is not recommended.
With the Straddle, you will have one of 4 possible outcomes.
- Nothing happens because the news didn’t drive the markets.
- Small volatility triggers both of your positions without any definitive movement meaning no significant movement and a lack of any big profits, but small losses because of your Stop Loss points.
- Positive trending in one direction after triggering both of your positions in which case your profits will significantly outweigh your Stop Loss on the other position.
- Positive trending in one direction after triggering only one side of your Straddle in which case you make large profits off the position(s) that was triggered.
With some practice and experience in your chosen markets, you will be able to start making money off economic news regardless of what that news might be.
This last strategy is formulated based on what “consensus” reports say will happen with a given set of economic data or news that is set to be released. The consensus is often not accurate and sometimes it is absolutely off. Nonetheless, people are trading based on this notion days or weeks in advance of the economic news.
In this way, the actual release can have a totally different impact on the market, even if it was 100% the same as the consensus. This is because major market players have already made their beds based on the consensus and prices have adjusted accordingly.
Therefore, when the news is announced, the market may go the opposite direction of what was expected as the major players take profits off their early positions. This is the classic example of “Buy the rumor, sell the news.”
There are two ways to play this type of scenario. The first is to try and jump in before the economic data is released based on consensus reports. Often, you will be able to open good positions based off these pre-release predictions and then sell them once the data is released.
The second option is to wait and hope that the predictions are wrong, in which case you can open positions more favorable to the actual report.
Here is how this can be achieved:
Let’s say that analysts have come to the consensus that U.S. consumer confidence is going to fall below 95 (this just recently happened with a consensus opinion of 94.9). You believe it is going to be above 95, but decide to wait until the report comes out.
In the chart above, the 1st red arrow shows how the market reacted to a consensus that the new Consumer Confidence report would be lower. The 2nd arrow shows what happened when the actual report was much higher than the consensus.
After the report is released and it is much higher than the consensus (95.5 or so), you enter a Buy position on one of the major indices, stock, or other related market and cash in from the traders that are late to the game, including those major players that are ditching their positions off the bad consensus.
If the news was actually worse than the 94.9 predicted, then you can take a Sell position as it will move down with the help of the major players that are now trying to further their stakes for more profitability.
Either situation requires you to be aware of both the date of the economic news, the consensus reports on what will be in the economic news, and a willingness to be ready to go once that news is announced.
Just as important is to have a clear idea of what positions you will take based on what news so you aren’t faced with indecision or react emotionally to the market and make poor trading decisions.
Put the Knowledge Into Practice
Now that you have some additional strategies on tackling the markets armed with the power of the economic calendar, its time to get trading. We strongly recommend utilizing your Demo Account to get more proficient in these strategies before going live or to start with small amounts and gradually increase them as you develop your skills.
Regardless on how you proceed, you now have a better base of knowledge on which to trade and reach your financial goals.