Why Using an Economic Calendar When Day Trading is So Important
As a trader, the Economic Calendar is one of your best friends. You will only spend one minute or less with it a day, but that one minute--every day--is crucial if you want to become a consistently profitable day trader.
What is an economic calendar?
An economic calendar shows the scheduled news events or data releases related to the economy and financial markets. These include GDP, Non-Farm Payroll numbers, and interest rate decisions.
There are loads of these economic date releases--many each week, and sometimes each day. These events are listed on the Economic Calendar along with the scheduled time of the release.
Each event is graded--depending on which Economic Calendar website you use. Minor events likely to have a minimal market impact are marked as "Low" (low impact) or don't have any special markings. Events that may have a market impact are marked as "Medium" and usually have a yellow dot or yellow star beside the event. Yellow indicates some caution is warranted at this time. Red stars/dots, or a "High" marking, indicates a significant news/data release which is highly likely to move the market in a significant way.
Risk Caused by High Impact Data/News Releases
As a day trader or even a swing trader, the events marked red are the ones you need to be aware of. Whether the data comes out way above, way below, or right in line with market expectations, volatility around the event is typical.
Because traders know these events cause volatility, which they may not want to be a part of (discussed in a moment), many traders cancel their pending orders, causing a drop in liquidity right before a market moving event occurs. Because there are fewer orders to absorb market buy or sell orders (or stop-loss orders) that are triggered by the event, the price will often "whipsaw" very quickly back and forth before choosing a more sustained direction.
Reducing Your Risk with the Economic Calendar
Check your economic calendar each morning, before you start trading, and jot down the times of the major data releases.
Under normal market conditions, you should know what your risk on every single trade is. The risk on each trade--where risk is the difference between your entry price and stop loss price, multiplied by the position size--should be less than 2% of account equity, and ideally 1% or less.
Assuming you are trading a stock (or other markets) with a tight bid/ask spread and significant liquidity (enough shares or contracts) at each price level to absorb your orders, typically your stop loss order will get you out of the trade at the price you expect. When a high impact data release comes out, though, things can drastically change. You face a very high chance of slippage, which is when you get a worse price than expected on an order. What was supposed to be only a 1% risk trade could end up resulting in a 5% loss or more, just as an example.
Because of this unpredictability--we don't know what data will be revealed, or how many orders will come into the market upon its release in a reduced liquidity environment--pro day traders typically close out their forex, stock or futures positions three to five minutes before high impact data are released. They also avoid taking new trades until after the data has been released. Since that moment of increased risk is scheduled, and can easily be avoided, it is best to do so.
If you day trade options, you can hold your positions through a major data (or earnings) release. Many options strategies are designed for trading these types of specific events. Options are a bit different than other markets, though. Once you buy an option (paying the premium) your risk is capped; the premium you paid is the potential loss. When you buy an option or close out the trade you may get slippage, but you can't lose more than the premium you paid.
An Economic Calendar For Different Markets
Whether you trade forex, futures or stocks there is an economic calendar for you. Here are some recommended ones.
For Forex: dailyfx.com/calendar
Options traders can also use the above calendar. If trading stock options, check the US earnings calendar. Earnings have a significant impact on price, just like economic data releases.