There are three main factors that combine to make economic events a great time to trade the markets, as long as we are armed with the necessary information and tools for success.
1. Source of Volatility
Economic events cause expected volatility. Traders love a volatile market, as it presents an opportunity for significant profits when played correctly. A stable market is boring and hard to profit from. However, unexpected volatility can wreak havoc on even the most experienced trader’s strategy, which brings us to our second factor.
Expected vs. Unexpected Volatility
Economic events are pre-scheduled. Unlike a tweet from the president, which can send the market into a frenzy with no warning, events like a quarterly earnings report or a Fed meeting are planned far in advance.
Example - Unexpected Volatility
On July 11th at 11:00 A.M. EST, Donald Trump Jr. tweeted out a copy of his email exchange with Russian officials. Although it was a relatively minor event that does not have long-term consequences, the S&P 500 immediately lost more than 0.5%. This is an example of a completely unexpected event affecting the S&P 500.
As you can see, the price returned to its previous level fairly quickly, but this kind of volatility can make life tricky for day traders, especially those who are very active and leveraged.
Where can we get the other kind of volatility - expected volatility? Expected volatility, that we can prepare for, comes from pre-scheduled news (macroeconomic events such as unemployment rate, GDP releases, etc.)
Economic events happen on a recurring basis. This is crucial because it means that we can measure how the market reacted to each situation, and predict a market move in the case of similar events.
With these three characteristics, we can start to design a system for trading economic events.
Reverse engineer the market logic
With presidential tweets or other unexpected events, we can imagine how we think the market should react, but the market is very unpredictable in these scenarios, and even seemingly good judgment can result in big losses. When trading scheduled economic events with BetterTrader.co, you can see exactly how the market has reacted to similar events in the past, and statistically analyze how it will move based on the results.