Why Using an Economic Calendar When Day Trading Is Important
As a trader, the economic calendar is one of your best friends. You will only spend one minute with it a day (or less), but that one minute—every day—is crucial if you want to become a consistently profitable day trader.
Defining an Economic Calendar
An economic calendar shows the scheduled news events or data releases related to the economy and financial markets. New GDP growth rate figures, the latest non-farm payroll numbers, and interest rate decisions—these are all examples of what you may find on an economic calendar.
There are loads of these economic data releases—at least once a week on average, and sometimes every day during particularly busy weeks. These events are listed on the economic calendar, along with the scheduled time of the release.
Each event is graded, and those grades depend on which economic calendar website you use. Minor events that are expected to have a minimal market impact are either marked as "Low" (as in, "low impact") or they may lack any special markings. Events that may have a market impact are marked as "Medium," and they usually have a yellow dot or yellow star beside the event. Yellow indicates some caution is warranted at this time. Red stars, red dots, or "High" markings indicate a significant news/data release that 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 as a swing trader, the events marked red are the ones you need to be aware of. Volatility around the event is typical and expected, regardless of whether the data comes out above, below, or right in line with market expectations.
Traders know these events cause volatility, and they may decide to sit out while the markets swing by canceling their pending orders. Those canceled orders cause a drop in liquidity right before a market-moving event occurs. Since 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" 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 is on every single trade. The risk on each trade—defined as 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.
Typically, your stop-loss order will get you out of the trade at the price you expect, so long as 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. However, when high-impact data is released, things can drastically change. You face a high chance of slippage (a worse-than-expected price on an order). What was supposed to be only a 1% risk trade could end up resulting in a 5% loss, for example.
You can't know exactly what data will be revealed, or exactly how many orders will come into the market upon its release in a reduced-liquidity environment. Because of this unpredictability, professional day traders typically close out their forex, stock, or futures positions three-to-five minutes before the high-impact data's release. They also avoid taking new trades until after the data has been released. Since that moment of increased risk is scheduled, it can be easily avoided, and it's usually 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. Forex and options traders can use dailyfx.com/calendar. If you trade stock options, check the US earnings calendar. Earnings have a significant impact on price, just like economic data releases.