HOW TO USE THE ECONOMIC CALENDAR IN BINARY OPTIONS TRADING
The decision to trade a financial product comes because of either technical or fundamental analysis. Or, both.
While technical analysis deals with interpreting chart patterns or technical indicators, fundamental analysis consists of trading based on interpreting the economic news.
For this, the economic calendar is key. Consulting it should be part of every trader’s ritual.
The thing is that the economic calendar is for free. Simply go on the Internet and search for it. The information is the same and the interpretation similar.
How to Interpret the Economic Calendar
A binary options trader uses the same information when buying a call or an option, like any other trader. It doesn’t matter if you trade equities, gold, oil, indexes…the economic news part of the economic calendar will move the overall markets.
As such, traders must know what to look for in the economic calendar and how to interpret it. It all starts with the red events.
Find the Central Banks Meetings
The economic calendar comes with a color code. This code splits the news into three categories: red stands for very important ones, market-moving news, orange for 2nd tier data, and yellow for 3rd tier news.
From the start, you can scratch the yellow news. Focus only on the red ones. These are the ones that will make prices travel.
When trading, everything is about the interest rate. Namely, what the central bank will do next time it meets to set the monetary policy. As such, the first piece of economic data you’ll have to mark in the economic calendar is the central banks meeting dates.
These meetings have different names in different countries. In Australia, the RBA (Reserve Bank of Australia) interest rate decision is called the Cash Rate, in Eurozone is the Minimum Bid Rate, in the United States is the FOMC (Federal Open Market Committee) Meeting and so on.
Central banks meet regularly to set the monetary policy for the period ahead. Some major central banks meet monthly (RBA, Bank of England), and others meet every six weeks (ECB – European Central Bank, Federal Reserve in the United States), or even quarterly (SNB – Swiss National Bank).
From a trader’s point of view, these dates are crucial. Any economic news or piece of economic data in between these dates, allow for traders to have an educated guess about what the central bank will do next.
Focus on the Red Events
After the main central bank's meetings are identified, traders focus on the red events. These economic news show how an economy changed between two central banks meetings.
As such, traders use them to form an idea about the next move in the central bank’s interest rate decision,
The economic calendar gives the time when the news is released (this is very important because trading algorithms are responsible for the huge spikes right at the top or bottom of the hour), the currency it refers, and the interpretation: why the news matters, why the traders care, and so on.
Moreover, the previous data is known in advance, together with an estimation or a forecasted value for the current data. And then the interpretation is made between how the actual differs from the forecast.
Look at What Matters
For all traders, no matter the financial product traded, interpreting news is the same. For any economy, simply search for the red events that show the changes in inflation (CPI), jobs data (actual numbers and the unemployment rate), GDP (Gross Domestic Product – the total value of goods and services an economy produces), retail sales, and the PMI’s (Purchasing Managers Index).
Next, look at their evolution when compared with the previous central bank’s meeting. If the general tendency is bullish, the chances are that the central bank will have a hawkish tone at the next meeting. Hence, this is bullish for the currency, economy, and so on.
If not, look for the opposite.
Conclusion
There’s plenty of information that can be obtained from the economic calendar. Binary options traders must understand that the market, in general, is highly dependent on this news.
We live in a time when humans follow robots in trading, as algorithmic trading dictates price action. As such, we must look at the same things as robots do, and interpret them on their own.
It is the only way to set the proper expiration date for your binary options.
