Education

An introduction to economic indicators

Those trading on the foreign exchange market base their decisions on two basic forms of market analysis: technical analysis and fundamental analysis. And while the use of technical analysis mainly goes down to one the assumption that current price movements are reflected in historical price dynamics, fundamental analysis takes into consideration all social, political and economic forces which affect the performance of particular company or economy as a whole.

As was mentioned in our introduction to the Fundamental analysis, there are multiple factors which must be taken into account when performing a fundamental analysis of financial instrument. Stock investors, for instance, carefully study company’s balance sheets and earnings report which frequently involves scrutinizing large volumes of data while forex traders scope through extensive economic calendars looking for key economic indicators, many of which can strike a big difference between success and failure of particular trade. These vital pieces of highly regarded economic data change the economic landscape, affect market sentiment and give rise to potentially profitable opportunities for those who know how to apply them properly. Let’s have a look at the topic in more detail.

What are economic indicators?

Economic indicators are important pieces of economic data released by a government or private agencies that detail countries economic performance. They give investors a much –needed outlook on the health of the economy and cause wild price fluctuations as most if not all parties on the market use them as basis of many trading decisions. Understanding that a great deal of factors and policies presented in economic indicators affect nation’s economic performance one way or another, many players, traders and speculators alike, rush to the market when these pieces of data are published. Speculators attempt to capitalize by taking advantage of crazy price volatility which usually dominates the market following the release of vital news while traders try to incorporate these data pieces in their existing trading strategies. Regardless of where you stand, it is worth noting that economic indicators should not be treated lightheartedly: many traders have lost huge sums of money by trying to speculate on key economic releases. That is why,

You should always study each economic indicator in great detail before rushing to trade it at on the recommendation of close acquaintance.

Types of economic indicators

Economic indicators come in many forms, from many sources and with varying frequency. Some tell us about the past (lagging indicators). Some tell us about the present (coincident indicators). Still others tell us about the future (leading economic indicators). Some are based on hard numbers. Others rely on gut feelings. Regardless of where they come from, what they look like and when they are released, each has something useful to tell us about the economic world in which we live.

Most economic reports are released at scheduled times and are usually displayed in the economic calendar. There is no universal criteria to identify the list of good or bad indicators. But traders should know which economic indicators are used to measure global economy or which economic indicator describe the process of constantly falling prices. Having this vital knowledge in the inventory can help you narrow down the list of economic indicators to employ in your trades.

Some of these reports are easily recognizable even from the long distance; these may include such measures as GDP, Trade Balance, Employment Numbers etc. These indicators usually get broad coverage in the media with major news headlines elucidating on the subject before and after release. Others, like Real Estate Sector Data, Personal Spending, Net Lending, etc. are not  followed so closely and as such cause much less in terms of price volatility. However, each indicator serves a particular purpose and can be useful.

How to use economic indicators?

Given the fact that economic indicators measure vital economic data, changes in key economic data is directly linked to the currency valuation. Still, successful application key economic data requires deeper knowledge due to a number of pitfalls associated with this part of market analysis. Below are some useful tips that may help you when conducting fundamental analysis in financial market:

  • Follow the economic calendar and has a listing of key economic releases. Also, watch future releases. Currencies, stocks and commodities are known to move in anticipation of certain news or report due to be released at certain time in the near future.
  • Test each economic indicator on demo account before going in with real money. Develop at least basic understanding of what type of reaction the indicator is causing on the market and whether it is worth the risk
  • Be informed about unique, non-recurring events that are expected to be key market movers. Brexit vote is an example of such event. Remember that the GBP sustained the biggest daily loss in history on the day of the vote, most likely generating huge profits for those who used this unique market condition to their advantage.
  • Don’t react too quickly to the news. Often numbers are released and then revised, and things can change quickly. Pay attention to these revisions, as they may be a useful tool for seeing the trends and reacting more accurately to future reports.

Conclusions

There are many economic indicators, and even more private reports, that can be used to evaluate forex fundamentals. It’s important to take the time to not only look at the numbers, but also understand what they mean and how they affect a nation’s economy. When properly used, these indicators can be an invaluable resource for any currency trader.