What are Economic Indicators?
Economic indicators do offer some important statistical information about a country economic activity. They are normally used as a useful preview to make a prediction on how the future performance of a given economy will be and also to identify possible business cycle. In this article we will be analysing the different types of economic indicators as those could turn very useful when we are doing online trading. We will also look at the importance of using economic indicators during trading and also learn which are the relevant indicators per country.
Economic indicators are many and generally are scheduled economic data releases, declarations and announcements by top factors in the financial arena that can influence share price significantly. Since Economic indicators tend to change by market we have separated the indicators by region: we will start with the US indicators followed by the European indicators and ultimately the Asian indicators.
The frequency of economic indicators can change from one indicator to another. There are some indicators that are released daily, others that are monthly and others that are quarterly. When the economic indicator is release there is a movement of the price based on market speculation. So we are used to say that an economic event has a double influence: in first instance when it is announced and secondly when it is compared with the speculation made before. If there is a big difference between the speculation and the actual figure than there could be a big shift in the market.
Some examples of top economic indicators are:
- Unemployment rate
- Interest rates
- New building permits
- Federal funds rate
- Changes in the Gross Domestic Product (GDP)
- Consumer Price Index (Inflation)
- Currency Strength
- Corporate Profits
- Balance of Trade
Each indicator will have an effect in its own market but sometimes the effect is not limited to a single market. Let’s say for example that a government will make a statement that more building permits will be given this will mean that there will be more jobs and therefore the unemployment rate is likely to be affected positively. This could also have an impact in consumption rate and finally will have a positive effect on the local currency. So although we tend to separate those economic indicators you can see that those are interlinked quite strongly with each other and also a single country economic indicator can potentially effect other countries (ie. US with Europe and the other way around).
Economic Indicator Examples
An economic indicator that has a major impact is the Non-Farm Payrolls (NFP) that is published every month’s first Friday by the U.S. Bureau of Labor Statistics. This indicator discloses the change in the number of employed people in the US from the previous month and it does exclude the farming industry. So this figure is representative of around 80% of the US work force. As you might deduct an increase in the number of newly employed people will usually show that the market is growing and as a direct result that the American Dollar will also strengthen. A forex online trader could potentially speculate that before the announcement is made and make a profit on the increase afterwards. Obviously it could also go the other way as if there is a slowdown in the employment than the US dollar will weaken. So the NFP is one of the most important economic indicators that normally cause vibrations in different financial assets.
Looking in Europe another example is the ECB Interest Rate Decision which is made by the European Central Bank. If the ECB will raise the interest rates this is normally seen as a good sign for the EUR and the trend will be a bullish curve. If however the ECB will keep the current interest rate or they will even cut it than the EUR will suffer and will be on a bearish trend. Not always we will see a significant movement of the EUR as if the outcome of the economic indicator will be as expected the EUR will not see much movements. It will only swing if the market will be taken by a ‘surprise’ by the news.
The Caixin Purchasing Managers’ Index (PMI) is another economic indicator of nationwide manufacturing activity and the attention in this case is on smaller and medium-sized companies. Let’s say that this month’s PMI will be lower than the expected number. In this case the market will fear that manufacturers will be forced to cut their staff numbers as a reflection of low production output.
What is The Importance of an Economic Calendar?
Having a frequently updated economic calendar is one of the main reasons for success for most traders. The economic calendar will cover all the key events and releases that will affect the forex markets and also the economy of a specific country: for a forex online trader but generally for any online trade this is where to identify opportunities for profit and work out strategies. Having a better understanding of why markets do react in certain ways and when they will do it is a massive step forward in being a successful online trader. With an economic calendar traders are able to anticipate market moves based on previous, actual and predicted numbers. So the release of key economic data are great trading opportunities that cannot be missed.
How to use Economic Indicators?
Is all good knowing what are the economic indicators but most importantly you have to know what are you going to do with it and how you can use them at your advantage. Regardless of the level of analysis that you will do as a trader it is very important to monitor the economic calendar and be prepared with a proper strategy. Once the trader knows that the event is going to happen (which will be indicated in the economic calendar) he will start to work out a speculation on the number that it will be released. Based on that speculation the trader will identify which financial instrument to trade and if open a buy or sell position. If the speculation is correct the outcome could be a very healthy profit on the trade. It is important to base the speculation on Economic Indicators on firm ground of rational thinking which is deducted by the analysis of the relevant markets and financial occurrences.
How To Put Economic Indicators to Work?
It doesn’t matter if you are an experienced trader or a beginner. You have to spend time to familiarise with the economic calendar and learn which one are the indicators that are closer to your trading strategies and how those can influence the markets. Once you will be proficient in making speculations on economic indicators you will find that those are triggers that can generate substantial earnings. So our strong advice is to draw up a clear strategy starting from the economic calendar so to be ready to make profit when things will be happening!