What Are Economic Indicators And How To Use Them Properly In Forex Trading ?

By Alberto Giusti

Like the stock market, forex trading also depends on fundamental and technical analysis. In technical analysis the statistical data from trading activities price movement, the volume of trade, etc.) are studied to identify trading opportunities. On the other hand, fundamental analysis looks at the inherent value of an asset or an investment. But, as the forex market deals in currencies of countries and their value with respect to another currency, it is difficult to conduct a fundamental analysis of a country.

In this scenario, news and information about the country play an important role. It tells us all the developments that might affect the economic indicators of the country. These indicators reflect the economic health of a country and determine the value of its currency.

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What are the economic indicators?

Economic indicators are reports that state the country's economic performance. They are how one can easily measure the nation's economic health. However, you have to also take into account that these indicators can be influenced by various political and natural factors. Some of the important economic factors which should be considered while forex trading are:

• Gross Domestic Product (GDP)

GDP is the total market value of everything produced in a country in a year. It is the most common but broad measure of the nation's economy. It can be somewhat compared to gross revenue earned by a company in a year. Since the GDP is considered as a broad measure, you should consider another report also which is released a few months before the final GDP report.

• Industrial Production

The nature of this report is evident from its name and states the total production of all industrial facilities including mines and other utilities in a country in one year. You can also know the extent to which each factory or sector's production capacity has been utilized in this period. Traders look for an increase in industrial production with near-maximum capacity utilization.

Change in weather or natural disasters and political condition affect industrial production and this report too.

• Retail Sales

This report states the total retail sales in a country over a year. This indicates the consumer spending of the country and also indicates the seasonal variations. This report can indicate the direction of the economy in a country and can be used to predict other indicators.

• Consumer Price Index (CPI)

CPI can tell us if the country is losing money or making a profit on its products and services as it states the change in the prices of consumer products across 200 different categories.

Other major economic indicators include –

• Policies regarding interest rates
• Inflation or Purchasing Managers Index (PMI) and Producer Price Index (PPI)
• Unemployment
• Business sentiment surveys and Consumer confidence surveys
• Trade balance
• Manufacturing sector surveys

However, the indicators discussed here are not the only factors that influence the price of a currency. You also have to consider third-party reports and analysis along with technical factors as they can also affect the valuation of a currency.

How can you use the economic indicators?

You have to use the economic indicators keeping in mind the currency pair you are focussing on at the moment as the relative importance of these indicators change according to the current economic state of the country.

The most common way to trade on news or data is to watch out for a period of uncertainty before the release and then trade on the breakout, however, you need to keep in mind these points –

• Make an economic calendar that lists all the indicators with their due release date. Don't always depend on the official channels but also listen to market rumors and speculations as markets often move according to them.

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• Listen to the market about the indicators getting the most attention. Quite often such indicators act as catalysts in the market for price and volume movements. Also, if you listen to the market you will know about the expectations of the market and whether the expectations are met. This is more important than the data as there might be a vast difference between the expectation and results.
• Look out for any revisions in the data as a change in the data can change the trade drastically. Another way is not to react too early but wait for some time after the data is released.

Conclusion

Trading news might sound easy but can be harder than you think. This is primarily because of the market volatility. You might make the right move but the market may not sustain the move. To trade successfully on news, you need to do your research well and listen to the market.

(Disclaimer: The article is sponsored and hence promotes some commercial links.)