The economic calendar can be an amazing tool to help traders understand what is happening in the markets, but it is not always easy to know how you can take advantage of it to make your trades profitable. In this article, we’ll discuss 3 strategies that can be used to make profitable trades by making use of the economic calendar.
Most professional traders understand that economic news will affect just about all trading markets in some way or another. Traders are able to make informed decisions if they use the data released by private sources and governments on the state of global, national, and local economies.
Many traders are however unsure of how they can translate this knowledge into increasing profits on their positions. At Olymp Trade, we help our clients by giving them access to their own customizable economic calendar for free.
Let’s now discuss 3 proven strategies that use the Economic Calendar to help you make better profits.
Use a Non-Directional Bias when Trading in Liquid Markets
Markets that are traded with the most volume and the most often are the most liquid. Good examples of these include not only the major indices such as the S&P 500, NASDAQ, and the Dow Jones, but also major currency pairs such as GBP/USD, EUR/USD, USD/CAD, USD/JPY, USD/CHF, and AUD/USD.
The reason all of these markets include the U.S. dollar is because the U.S. dollar is seen as the reserve currency for the rest of the world. Although the U.S. also has the biggest economy in the world, that’s not really the point.
The key factor is that those markets typically have the tightest spreads. When reports and news that affect those markets is released, there is a very pronounced reaction in the marketplace, and this provides many possibilities to make a profit from the resultant action.
Key data releases such as GDP, U.S. unemployment, wars, U.S. Federal Reserve (Central Bank) decisions, disasters, etc. will have a significant adverse effect on these markets in terms of moves outside their norms.
New trends often start after news based on the economic calendar is released, even if the trends only last for a short period. Traders therefore have the opportunity to hitch a ride on the fresh trend and exit with a profit soon thereafter.
The important thing is to keep updated on new economic news stories and data so that you’ll be ready to move and take advantage when the time is right.
Market Straddling
Another non-directional strategy is known as straddling the market. This allows traders to set up positions in specific markets before data on the economic calendar is due to be released.
To use this strategy, traders first look at when key data is scheduled for release and then study the charts of the assets that will likely be affected to see in which price channels they typically trade. The price ranges will become more accurate closer to the actual release.
Let’s look at a fictional example. The U.S. Federal Reserve has made a decision on whether they will cut interest rates or not, and it is due to release their decision. Many people agree that the rates will be cut, but some people question the reasoning behind it.
As we don’t know how the market will react, or even what the Fed will do, we look at the markets that will be affected by this decision. This would be the major U.S. indices, USD currency pairs, etc.
Let’s for example look at the Dow Jones Industrial Average and see how a “straddle” can be set up. In a 15 minute chart, the 10 period EMA stays in the 26832 to 26840 range.
If the current price is 26836.5 and the news is about to be released, the short term targets should be set at 26832 and 26840. Set a Sell position at the lower end (26832) and a Buy position at the upper end (26840) and a Stop Loss point for Forex plays at 5%.
Irrespective of which way the price goes, we now have positions in play that the movement will trigger after the announcement. Only one of our entry points will be triggered in the best case scenario and we can then cancel the other one, but be careful that you don’t cancel too quickly.
We can also set up additional longer term straddles further from the current price. Simply extend the range by an additional 5 to 7 points and set up more positions. This will layer your entry points, maximizing profit while it will minimize any losses from an unexpected reversal
It is not recommended that you try to straddle the market in real time after the news has already been released. This will often result in losing good entry points, while it also allows emotions to come into play at a critical time, which is never a good thing.
There is one of 4 possible outcomes with a straddle.
- If the news does not drive the markets, nothing will happen.
- If the volatility is small and it triggers both positions without significant movement, you will not make big profits, but losses will be small due to the Stop Loss points.
- A positive trend in one direction after both positions were triggered will result in profits significantly outweighing the Stop Loss on the other position.
- A positive trend in one direction after only one side of the straddle was triggered will result in big profits from the position that was triggered.
Some experience and practice in using this strategy in selected markets will enable you to start making profits from economic news, irrespective of what the news may be.
Directional Bias
This strategy is based on what the consensus is about what will happen when a specific set of news or economic data is released. Sometimes, the consensus is absolutely off and it is also often not accurate. People nevertheless trade based on this notion days, or even weeks before the economic news is set to be released.
This often results in the actual release having a totally opposite impact on the market, even if it was exactly the same as the consensus. This is due to major market players having already made their plays based on the consensus and prices have already been adjusted accordingly.
When the news is released therefore, the markets may move in the opposite direction of expectations due to the major players taking profits from their early positions. This is a classic case of “Buy the rumor, sell the news.”
There are two ways in which this type of scenario can be played. The first is to make your play based on consensus reports before the economic data is released. You will often be able to open a good position based on these predictions and then sell them after the data has been released.
The second way is to hope that the predictions were wrong and wait. In this case, positions can be opened that are more favorable to the actual report.
Here is an example of how this can be done:
Let’s presume that analysts agree that U.S. consumer confidence is going to drop below 94, say to 93.9. Although you think it will come in above 94, you wait until the report is released.
After the report comes out and if it is higher than the consensus (94.5 or so), you open a Buy position on a related market and make a profit from the traders that enter the game late, including the major players that are selling their positions from the bad consensus.
If the news comes in lower than the 93.9 that was predicted, you open a Sell position as the related market will move down due to the major players trying to increase their stakes for bigger profits.
Either scenario needs you to be aware of both when the economic news will be released, the consensus reports on what the economic news will be, and the willingness to move once that news is released.
It is equally important to fully understand which position you will take depending on what the news is. This will prevent you from being faced with indecision or reacting emotionally and making poor trading decisions.
Apply your Knowledge
With you now having a few new strategies that you can use to tackle the markets by using the economic calendar’s power, it’s time to apply your knowledge. It is recommended that you first use the Demo Account to get more skilled at using these strategies before going live, or to begin with smaller amounts and increase them gradually as you hone your skills.
Regardless of how you decide to move from here, you now have additional knowledge you can use for trading and reaching your financial goals.