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Trading needs to take into consideration both technical and fundamental analysis. While here on Fair Binary Options Academy we looked at the technical part so far, having more than twenty different technical analysis concepts on the project, it is time to take a look and see what is fundamental analysis and how can a trader make the most out of it.
Markets are also moving based on the economic news that are released on a timely basis. When trading binary options based on a currency pair, or, Forex CFDs, then it should be considered that the currency pair is actually represented two different economies. For example, the EURUSD pair, the most traded currency pair of them all, it is also moving based on the differences between the US and Eurozone economies, so analyzing and interpreting those economies is something that traders do in order to have an educated guess about future price movements the EURUSD pair makes.
What is Economic Calendar?
The economic calendar is a clear schedule, known in advance and it is free to be found on the Internet as many websites are offering it.
- Many Forex and CFDs brokers have Economic Calendars as part of their platform, which means its integrated and you can find it without leaving the broker website.
This calendar is easy to use and interpret the data as it has clear rules showing:
- the time the economic news is released; the currency that is going to be affected;
- the standard interpretation (how should the currency move based on the actual news that is released);
- the importance of the economic release;
- the history of the economic release as a trader can go back in time, more than two years of data being shown.
This way a chart can be plotted and identified possible tops or bottoms in a trend, growth or weakness as well.
Economic Calendar Study Checklist
There are a lot of things to look at when studying the economic calendar and the following list should be a check list with the most important ones:
- firstly, there is the date that the trader is interested in as the economic calendar is not only showing the economic events that are supposed to be released in the future but also the previous ones. So, if you are interested in finding a trend or what the previous data was and looking for a comparison then you can select the period.
- there is nothing more important than knowing which currency is influenced. If the news is coming out of Eurozone, then the Euro is going to move much so look for the Euro pairs to move the most. If the news is coming out of Australia, then Australian dollar pairs are going to be more active. If the news on the other hand is coming out of China, then still the Australian dollar is influenced the most as it is a well-known fact that Australian exports are going mostly in China.
- the next thing to look at is of course the previous release, then the forecasted value to be released, and of course the actual. The trading part is made at first by trading algorithms or expert advisors and then by real traders, humans. If the actual is bigger that the forecasted values, then that is bullish for the currency and depending on the currency pair that is traded, call or put options can be traded. It is similar with Forex CFDs, where, if reports indicate a weakness of a currency, the Sell order is in place and vice versa. But trading CFDs is not only about currency pairs, even though they are very well represented. Stocks can be traded as well with CFDs, and oil and gold can be traded too. In this case the reports will hit the stock or the whole industry in some cases, or with the oil reports – both the industry and the oil price.
Market Events Around Specific Equities
For the equities, there are the classical economic news that influence price action at the macro level but one can also look when internal news of a specific company is released. I am talking about finding when earnings are released and when important information, as well as press conferences are scheduled. This should prove to be vital for trading in general and for setting the expiration date of an option as well. For the oil market, the same economic calendar is providing info related to the levels of oil inventories and it is well known the inversed relationship between inventories and production levels.
If inventories are rising more than expected, it is being said that they are building up and this is bearish oil as this shows less demand. One can trade directly put options on the oil product or, if the oil asset is not being offered by the binary options broker, then trading Canadian dollar currency pairs is the way to go as the CAD is linked to the oil market.
So, on the example from above, higher inventories should lead to lower oil prices and lower CAD, so call options on the USDCAD pair can be traded. More details about the economic calendar and how it is looking like are coming in the video recordings to be found in this article.
Indicators Used With the Economic Calendar
- GDP reports – let investors gauge the state of the economy and adjust their expectations. If the GDP turned out better than they anticipated, it’s a case for more positions usually. Vice versa, worse GDP numbers than expected lead to a revision of expectations downward and affect market negatively.
- Housing starts – This is an important indicator for the US where housing constitutes a huge part of the wealth of households and their equity. Since the housing bust and financial crisis this indicator has even gotten more prominence.
- Industrial production – Even with the industry share of our economies falling, the industrial sector is an important gauge of economy-wide demand since it requires many inputs and employs best paid middle-class jobs.
- Producer Price Index – Is a gauge of industry-wide demand and the pricing power of companies. Falling pricing power indicates usually weakened demand for industrial products.
- PMI – Purchasing Manager’s index compounds expectations of several thousand purchasing managers in biggest companies in order to gauge the state of the economy. It is usually interesting because it leads GDP and is published monthly (one preliminary, once full)
- Consumer Confidence Index – survey of consumers offers answers about current state and expectations of households regarding their income, financial situation, and consumption demand.
- Consumer Credit Report – similarly shows the state of household credit in the economy. It is important since credit growth indicates expected rising incomes in the future and confidence about the economy prospects.
- CPI inflation rate – inflation rate is best seen in the context of monetary policy. If the CPI is below the goal of monetary policy, there is a chance the equities might rally, but this depends on the communication coming from the central bank.
- Durable Goods – this report shows the level of demand for capital goods in the economy. This is important because it helps gauge the level of investment demand in the economy.
- Employment reports – as expected show an improving economy if the employment is rising more than expected and this boosts prices. If the employment is not keeping up,
- Existing Home sales – while housing starts show demand for homes, existing sales can gauge the current state of the market and possible changes in prices of houses. This will further signal changes in housing starts.
- Factory Orders – order books of factories tell us how will the industrial production and general demand grow in the future. It is published monthly.
- Jobless Claims – the report showing how many people filed a request to get unemployment assistance.
- Trade Balance – Shows the level of domestic and external demand for the product of a country. It is important for countries such as China, Japan, Germany and emerging markets.
- Retail Data – show turnover at retail stores and indicates the level of consumer purchases.