What are Economic Events?
At the core, an economic event is an instance that can or will affect the economy on some level. Usually, depending on the nature of the event, the markets will react. As traders, we want to pay close attention to these occurrences usually by watching an economic calendar. However, we shouldn’t be satisfied by simply knowing when and what time these events will occur. Before we go into specifics, you should know the core concepts of reading an economic event.
Key Concepts of an Economic Event
Country/Currency: In what country is the event happening and will it affect the markets your trading? Especially important if your trading currencies or commodities such as oil.
Impact: The impact measures the importance of the event for traders. The higher the impact, the more volatility you should expect to see. It's important to note that the impact of an event often differs based on the markets you trade. For example, the Manufacturing Production (YoY) report that measures the manufacturing output in Great Britain may have a large impact on the British Pound Market but may have little to no impact on the Livestock Markets.
Expectation: Before every economic event there will almost always be a forecast by the analysts in the sector. We want to watch this number as it can show us just how much of an impact the actual release will have.
Actual: The actual value of the event. The actual numbers won’t be posted until the event occurs at the specific time posted.
After the numbers for the actual have posted, we want to look at the variance between the Expectation and the Actual. Did the actual numbers differ greatly from the expectation of the analysts? If so, depending on the numbers and nature of the event we can look for this new data to push the market.
Economic events don’t impact all markets equally, it's important to identify and understand what events drive the markets you trade. For example, if your trading the EUR (European dollar) you would not only want to watch for events like the Eurozone Core CPI (European Core Consumer Price Index) but also events that drive the US dollar, such as the Non-Farm Payroll report because both markets trade off the other.
Why are economic events so important?
The best thing about economic events is that they can bring volatility to the market. As traders, we need this volatility to drive the market into new places to capitalize off of our trades. However, not all volatility is good volatility. If its unexpected news the market can go crazy, throwing off even the most seasoned trader, which brings us to another reason why economic events are so vital.
Scheduled reports and Fed meetings are planned well into the future; this means that we can prepare and form a plan ahead of time before the volatility hits. Finally, most economic events happen repeatedly, which give us a vital tool that allows us to measure and help us better predict the market. We can go back and study not only the data but how the data impacted the market.
Conclusion
Professional traders know how to make economic events work for them. If you are prepared for the event: studied the past data, past impacts as well as have a trusted system and method in place economic events can be great opportunities to help drive your trades. However, if you’re not prepared or are a new trader with little experience in the market its recommended you study the event and wait to trade until the volatility has died down. Use that time instead to study the event and learn. In the following courses, you will learn about economic events that regularly happen in the market and how they might affect your trading.