How Anyone Can Profit From Economic Events

Economic Events provide the prepared trader with profit opportunities because these events impact the markets. If we can prepare for a change in the market ahead of time we are much more likely to profit from that change. As Jesse Livermore, who is one of the most famous traders of all time, famously said “I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that.”  

Economic Events that impact the market happen all over the world on a daily basis, usually an average of five significant events a day. In this article we will explain what these events are and how to prepare for these events – a skill that is the bread and butter of any professional traders.

The Expectation

For every economic event, there is generally a prediction made by analysts before the data is released by the official entity. Analysts determine the outcome they expect to be released based on a variety of factors. If there is a relatively large difference between analysts’ expectation and the actual data of the economic event then it is likely to cause a significant impact on the market. The same is true in the reverse, if the difference between analysts’ expectations and the actual data is relatively smaller then the impact of the event on the market will also be smaller. This makes intuitive sense since after all if there is less surprise for the market then there is less impact.  

Japanese Exports Example

We will demonstrate this concept with real numbers by using the quantity of Japanese Exports for the last year. This data is made available by Japan’s Ministry of Finance on their website at a pre-scheduled time on a monthly basis, we will specifically be using the statistics for May 2018.

For the month of May 2018, the average of analysts’ expectations was a YoY (Year over Year) change of 7.5 %. The actual data released by Japan’s Ministry of Finance on May 21st, 2018 was an 8.1% YoY change. That is roughly a 0.6% difference, and the data was stronger/better than the analysts expected. It is stronger since more exports for a country is equivalent to more sales for a store, which is always good.

We should also compare the previous years’ data to this years to see the bigger picture, if Japanese exports are rising or falling and to put the analyst expectations in perspective. This is all historical information that should be gathered before the economic event.

Historical Information To-do List

1. Review the actual historical economic event data for the last 3 years
2. View the analysts’ expectations for those historical events
3. Calculate the average of the analysts’ expectations (approximately 50 analysts’ is a good number where possible)
4. Calculate the average analysts’ expectation for the current economic event
5. Search for a historical event where the current market situation and the average analysts’ expectation is similar to the current economic event in order to see the impact it had then.

Using historical data, we can see that both the actual and expected Japanese Exports for May 2018 were significantly lower than the 6822Bn for April 2017.

Now it gets trickier because we need to figure out which markets are likely to be impacted by the economic event. This is one of the hardest questions to answer, but we will give you more insight through this article. The first step to try and answer this question is to do Backtesting.

Backtesting To-Do List

1. Identify the historical data that matches the situation of our event.
2. Check how many times historically the situation occurs.
3. Check if there is a trend between the actual and predicted information in those specific situations.
4. Check if there is any clear correlation between the economic event we are monitoring and any other markets

At this point, we can identify if our theory is statistically likely to occur and therefore if we should adjust or keep our existing theory. At this point, we are more prepared for the release. We now wait for the data to be released, and finally, the big moment arrives! The data is released and the event has occurred, but now what? Now we must repeat all of the steps in our Historical Information and Backtesting To-Do List as part of a new After the event To-Do List, the only difference is we now add the actual data to our comparison criteria. We do this to gain confidence in our potential trades.

All of this preparation and work is not a simple task and one of the biggest issues is that the market waits for no-one! This means that all of these complicated tasks need to be completed in a split-second. Once we have actually completed all of the tasks, another issue is that we can never be entirely sure exactly which markets will be impacted. News can impact many different markets. We may miss certain correlations, which could result in us not trading in all of the correct markets, causing us to lose out on profit opportunities. Or worse, we could trade the wrong market and lose money.

This is a lot to grasp for any trader and it is essentially impossible to get this all right with brain power alone. There are therefore many interfaces designed to make all of these tedious, complicated steps much simpler.

As BetterTrader.co we provide an interface that contains all of the essentials to help users be successful traders. The information that we provide is helpful for beginners to professionals. Throughout the rest of this article, we will address how BetterTrader.co presents information in an easy to use format.

The Better Approach

It is essential that you understand the basic elements of trading before you jump into news trading. These fundamentals will help ensure that you understand exactly what you are doing and subsequently help prevent unnecessary mistakes. Below we start with explaining where these fundamental aspects are located on BetterTrader.co. We start by explaining event cards, which are also described in the video at the bottom of this blog.

1. Name of Economic Event – A range of events can be found on the platform from surveys (such as the consumer sentiment) to collected statistics (such as Unemployment rate and GDP). It is a fact that surprises will occur and the news about them will either directly or indirectly cause a strong or weak affect in the markets. The news can affect any range of markets from the Foreign Exchange markets to the commodity markets and more.

In the image below the event just released is “Exports YoY (Year over Year)”, this means we are comparing this year’s numbers to last year’s to see if exports are declining or growing.

2. Event currency and country or region – The country or region that this event belongs to. In the image below the event is taking place in Japan, which is made clear by the Japanese flag.

3. Pre-scheduled release time – The exact time the news of the event will be released. Economic events are pre-scheduled – this means we can prepare and be ready to trade them at the exact time it is released. From the time the news is released the markets may continue reacting to the released news. The majority of the reactions usually occur up until 90 minutes after the release. In the image below, the Japanese level of Exports will be released at 19:50.

*Any economic calendar shows the events in the time zone that the user set for himself.

4. Impact –  Also known as “Importance” in some economic event calendars. It represents how important this specific economic event is.

All economic events have been categorized by our team of experienced traders. They rank the events starting with the one that will have the strongest impact on the market and ending with events that are not likely to have any market impact at all.

Three white exclamation marks represent events with information that every trader needs to know to avoid making big mistakes.

Two white exclamation marks represent events that most traders will look at and base their trade execution on.

One white exclamation mark represents an event with important information for general knowledge but not specifically for trading.

For example in the image below Japanese Exports (YoY) has two white exclamation points, therefore it is interesting but not necessarily tradable.

5. Prev – (The abbreviation of previous) refers to the last time this event took place, usually one month or one week before. Each event is released periodically, either weekly, monthly or yearly. Each event has its own unit expressed as a percent or a number, in our example, the number above “Prev” in the image below represents a 7.8% Year over Year (YoY) growth.

6. Exp – the abbreviation of expected – refers to the expected value for the event that will be released. This number is important because the difference between the actual number (the next one to be released) and the analysts expected number will directly impact the magnitude of the surprise. This deviation from what was expected is what causes the market to react. In the image below “Exp” refers to the analysts expected value which is displayed above “Exp” and is the number 7.5%. Thus, the analysts’ expectations for Japanese Exports in the next release is 7.5% higher than last year.

7. Actual – Refers to the result of the event that was just released. This number is important because the difference between it and what the analysts expected the number to be will directly impact the magnitude of surprise. This deviation from what was expected is what causes the market to react.

In the image below the “Actual” number shows that Japanese Exports Stronger by 0.6% YoY from what was expected.

8. Magnitude of Surprise –  Magnitude of Surprise reflects how much the market is surprised by the actual release. Trading opportunities are created by the market reacting to the new information. From an economic event perspective, the difference between analyst expectations and the actual number for the release is the new information that will cause the market to react.

We categorize every instance of an event by calculating the difference between analyst expectations, the actual results and the historical results.

The categories we use are:

For stronger releases (Positive for the economy):

•   A Bit Stronger (not likely to have a strong impact on the market)
•   Stronger
•   Much Stronger
•   Extremely Stronger (a very big surprise that is likely to have a significant impact on the market)

For weaker releases (Negative for the economy):

•   A Bit Weaker (not likely to have a strong impact on the market)
•   Weaker
•   Much Weaker
•   Extremely Weaker (a very big surprise that is likely to have a significant impact on the market)

When the actual release is the same as analysts expected:

•  As Expected.

As seen below the Japanese Exports were a bit stronger than expected.

An important side note:

It is true that generally speaking a higher actual number is a positive for the economy (therefore Magnitude of Surprise will show a reading in the “stronger” range).

There are however events that do not follow this general trend, events where a lower number represents a positive indication for the economy (resulting in Magnitude of Surprise with a reading in the stronger range) and a higher number represents a negative indication for the economy (resulting in Magnitude of Surprise with a reading in the weaker range).

For example:

Analysts were expecting the unemployment rate to be 5% and the actual release was 4%. This means the economy is doing much better than analysts expected because less unemployment means a stronger economy. In this hypothetical case Magnitude of Surprise would show “Extremely Stronger” because it is a positive for the economy (even though the actual number was lower than expected).

9. History – of the statistics for this same event over time.  The historical values are represented in two ways:

• As a chart. The values in the charts will usually be from the last year, so users can make a comparison and see if there is a trend. According to the chart below, the Japanese Exports (YoY) are reasonably stable within the 0% to 20% range making it less difficult to predict the outcome.

•   As a list of past events. Here (see the image below) you can click on each event to see the details of the past event. As you can see there is a drop-down box “More” where you can go back as far as the data that is available (which happens to be forty years of data in this case).

10. Description – A full-length description of the event is also included in this section. At times the title alone is ambiguous. In our example, we may not have known that Japanese Exports (YoY) for May 2018 refers specifically to the growth in Japanese Exports from the previous year. This provides some essential information we may have missed.

11. Perspective Insights – Highlights analysis related to the event that either will be released or already was released. It looks at the magnitude of surprise and using this magnitude it provides the user with insight about the event from a historical perspective. Using the Japanese Exports (YoY) example, before the event, it showed “Was expected: This release is the largest positive growth in 5 months”. After the event, the data has now been released and it now states “1st positive release for the last 3 months”. This helps give the trader insight into the true value of the shock effect. In this situation, by it being the 1st positive release for the last 3 months it means that the market would likely have been expecting the actual result to be lower than the expected. This means that since it was higher it is likely that it could have effects, like the value of the Japanese Yen increasing in value.

12. Range – The range for the past couple of years. A glance at the image below will tell us that Japanese Exports (YoY) was within the rand of -14% to 18.1% in the last 3 years. This means it is a fairly predictable indicator.

13. Surprise range – Surprise range for the past couple of years. This indicator shows the range of analyst mistakes for this event. In other words, how much, the predictions of analysts differed from the actual release. In the image below, we can see the Surprise Range for Japanese Exports (YoY) has been between -4.8% and 5.3%. This is a fairly large error margin so when predictions differ from the actual results the event may still have no impact since the markets are expecting the expected and actual value to differ slightly.

14. Alerts -This tool enables users to be notified before the event is released. If you would like to follow an event and to be notified before the event’s release, you can click on the bell icon, and the blue message will appear and state that you will receive notifications about the event. This will ensure that you are aware of the event, preventing you from missing important releases and helping you to gain a better trading advantage.

If you would like to unfollow the event, just click on the icon again and a new message will appear assuring that you will no longer receive notifications about the event.

15. Potential Trade-Ideas – This feature helps you prepare before the event is released, it shows how the market reacted to similar situations in the past. It also helps you understand how the market reacted to different levels of releases e.g. Much Stronger or weaker. The purpose of this tool is to help you prepare before the event, ensure that once the actual data is released you already know of the existing opportunities. This helps ensure that you can trade immediately, maximizing profit opportunities. The trade ideas give you insight about which markets to buy or sell because you are aware of how the market reacted in similar situations.

In our example (shown in the image below) we can see all of the related instruments and how they reacted in various shock effects of Japanese Exports (YoY). In May 2018 the result was “A bit stronger” we can see that in 75% of similar situations when it was a bit stronger than the USDJPY went up.

“Potential Trade Ideas” will be available only for users of the paid version (Advanced or Basic Plan). **Also available as part of a free 14-day trial.

16. Trade-Ideas – Is also included in this feature and is very similar to Potential Trade-Ideas except it is after the event has happened and the Actual data has been released. Therefore, the chart telling us what to do based on what the Magnitude of Surprise will be is not relevant anymore. We already know what the Magnitude of Surprise is (in the Japanese Exports (YoY) example it is “A Bit Stronger”). This part of the feature will be available to free users but only 60 minutes after the event data has been released. See image below.

All of these fundamental elements will provide you with essential insight into news trading. Without knowing these elements it is nearly impossible to ensure you are apart of the 10% of day traders that actually make a profit. To use BetterTrader.co you can sign-up page is here. Remember you can test all features for a free period of 14 days. Now you have all the information necessary for it!