What if we are trading before the release of an interview with the Fed’s President? What if we have an open position before the release of the decision about European interest rates? Is there a possibility to make profits from the volatility of the market triggered by the data?
Economic indicators are statistics that indicate the current condition of the economy of a state, according to a particular area of the economy (industry, labor, market, trade, etc…). They are published regularly at a given time by government agencies and the private sector.
These statistics help Forex traders to measure the trend of economy so it is not surprising if these statistics are followed closely by almost everyone in the financial markets.
After the publication of these indicators, it comes into play the volatility of the market. The degree of volatility is based on the importance of the indicator. For this reason it is important to understand which indicator is significant and what it represents.
The most common economic indicators are:
- Fiscal and monetary policy of a government: these kinds of decisions are taken by governments to ensure the stabilization of the economy of their countries.
- Interest rates: they play a major role in the movement of currencies prices in Forex. The differences in interest rates affect the relative value of one currency relative to another, because currencies are the representations of the economy of a nation. So, when central banks change interest rates, they cause movement and volatility in the Forex market.
- Trade Balance: this is the ratio of the sum of the payments received from abroad and the sum of payments to foreign countries. If the incoming payment exceeds the payments to other nations and international organizations, the balance of payments is positive. The excess (or surplus) is a favorable factor for the growth of the national currency.
- Gross Domestic Product (GDP): it represents the total market value of all goods and services produced within a nation in a year. Since the GDP data are often considered lagging indicators, most traders focus on the two reports that are published in the months prior to the final data of GDP, the anticipated (or advance) and the preliminary report. Significant revisions changes between these reports can cause considerable volatility.
- Employment: this indicator reflects the overall health of an economy. To understand how an economy works, it is important to know how many jobs are created or lost and how much people are asking for new unemployment benefits. For the calculation of inflation, it is also important to monitor the rate at which wages grow.
- Index of Consumer Prices, the most important indicator of inflation. It represents the change in the level of retail prices for primary goods to consumers. Inflation is linked directly to the purchasing power of a currency and affects its position in international markets. If the economy develops in normal conditions, the increase in the index of consumer prices may lead to an increase in interest rates. All this, in turn, leads to an increase of the convenience of a currency.
- Retail Sales: this indicator is released on a monthly basis and it is important for Forex traders because it shows the strength of consumer spending. The report is particularly useful since it is an appropriate indicator of broad consumer spending patterns, which are modified with seasonal variables. It can be used to predict the performance of the most important indicators in delay, and assess the immediate direction of an economy.
These indicators works better on raw materials and Forex trading, however, the variables are too many to make an accurate analysis.
In addition to economic indicators it is possible to find consensus, values about communication expected from analysts. These data are used to make decisions that anticipate possible attitudes of the market.
Often the community of traders and investors interpret them in different ways, so it is difficult to decide what to do before their release.
To deepen this information is enough refer to the economic calendars, which brokers put at the disposal of operators with days and times scheduled for release. In these communications, we can find everything we need to make trading; the important thing is to understand how to interpret these data.