There are many factors that influence the exchange rates of currencies on a daily basis. While most Forex traders rely on technical analysis to make their trading decisions, the truth is that combining technicals and fundamentals can boost a trader’s performance to a large extent. Fundamentals create trends and reverse them and it’s no wonder that professional traders focus heavily on fundamental factors in their trades, while using technical levels only to find the perfect entry and exit points.
Although many traders feel overwhelmed with the various aspects of fundamental analysis, they can still scratch the surface of fundamentals with an easy-to-use tool – the economic calendar.
How to Read an Economic Calendar?
Economic calendars show the main market events and reports which are scheduled for the upcoming days, and many of the events have a great impact on the Forex market. Take the US non-farm payrolls for example – analysts at investment banks have actually been fired for missing this market-moving report which is published by the US Department of Labor each first Friday of the month. And if investment banks pay attention to something, traders should follow.
You can check the importance of market events by using a Forex currency converter – check the exchange rates before and after an important economic release, and you’ll likely notice a big difference in the value of affected currencies.
An economic calendar has a number of fields which show various information on a particular market event. A good economic calendar will have the time for which the event is scheduled, the currency that will likely be affected, the importance of the event, as well as the actual, forecasted and previous numbers. Traders need to follow the forecasted numbers and compare them with the actual number once it’s released. If they differ a lot, there might be a strong market reaction to the event.
The reason for this is that forecasted numbers are known days or even weeks before the actual number is released, and the market has already discounted the forecast into the current market price. Once the actual number is released, market participants reassess the current market price and create buying or selling pressure depending on the value of the actual release. In layman’s terms, if the actual release differs a lot from the forecast, the market may strongly move up or down.
Another way of analyzing the reports of an economic calendar is by identifying the trend of the reported numbers. In other words, if the unemployment rate in the United Kingdom shows a falling trend over the last couple of months, there is a slightly higher chance that the current month’s data will follow the previous trend. Although this information might be already discounted in the market forecast, it’s still a good way to gauge the actual number.
Combining an economic calendar with your every-day technical trading can help you in making better trading decisions by assessing the current economic situation in a country. Simply look for the forecasted market number and compare it with the actual release, and check the trend of the previous releases to get a feeling of where the economy is heading. Large differences in the actual and forecasted numbers tend to have a great impact on the Forex market, and traders should always be aware of the upcoming releases.