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News-Trading and Economic Indicators

News-Trading

Economic Indicators

An economic indicator is an economic statistic (periodic-release) that aims to provide information regarding how an economy or an economic zone has performed during a particular period. Economic indicators are divided in three main categories as concerns their timing (leading, coincident, lagged) and in three categories as concerns their attributes (Procyclic, Countercyclic, Acyclic).

 

Economic Indicators and Timing

There are three types based on their timing:

1. Leading Indicator (Before)

Leading indicators are very important as they tend to change before an economy is changing. That means that leading indicators can be used as signaling-mechanisms of upcoming macroeconomic conditions. For example the Consumer Confidence Index (CCI) and the Home Sales Report are considered two important leading indicators. In addition the performance of the Government Bonds or the stock-market index can be considered as leading indicators.

2. Coincident Indicator (At the same time)

This type of economic indicator changes at the same time as an economy is changing (for example GDP).

3. Lagged Indicator (After)

A lagged indicator is changing a few quarters after an economy is changing (for example unemployment).

 

Economic Indicators and Attributes

There are three main attributes of Economic Indicators based on their relation to an economy’s performance

(i) Procyclic Indicator: Moves in the sane direction as an economy (for example GDP)

(ii) Countercyclic Indicator: Moves in the opposite direction as an economy (for example inflation or unemployment).

(iii) Acyclic Indicator: Has no relation with the economy.

Create your Own MT4/MT5 Trading Indicators for Free

 

The most Important Economic Indicators

Here is a list with the most important economic indicators:

1. Interest Rates

□ Importance: Enormous *****

□ Influence: Forex, Equity Markets, Commodity Markets, Bonds Market

□ US Release: US interest rates decisions are made by FED 8 times per year

□ ECB Release: The European Central Bank meets monthly to decide about its interest rates policy (Between the 10th and the 14th day of each month)

This is maybe the top economic indicator which can lead to extreme volatility and straightforward movements.

Interest Rates Decision

2. Gross Domestic Product

□ Importance: Enormous *****

□ Influence: Forex, Equity Markets, Commodity Markets, Bonds Market

□ US GDP Release: US Advance GDP released 1 month after the end of the quarter by the Bureau of Economic Analysis (BEA). Final GDP released 3 months after the quarter’s end. GDP releases during the last week of each month.

□ Europe’s GDP Release: Monthly by Eurostat

Gross Domestic Product (GDP)

3. Employment / Unemployment

□ Importance: Great ****

□ Influence: Forex, Equity Markets, Commodity Markets, Bonds Market

□ US NFP Release: The NFP report is released on the 1st Friday of every month by the US Bureau of Labor Statistics.

□ EU Unemployment Release: Monthly by Eurostat, usually during the last day of each month or the first day of the next month

US Non-Farm Payrolls

4. Consumer Price Index (CPI) / Inflation Reports

□ Importance: Great ****

□ Influence: Forex, Equity Markets, Commodity Markets

□ US CPI Release: The CPI report is released on a monthly basis by the US Bureau of Labor Statistics between the 15th and the 22nd day of each month

□ Europe’s (HICP): Eurostat announces the HICP Harmonised Indices of Consumer Prices) each month:

- The HICP of the previous month (middle of the month)

- A flash estimate of the current month (end of each month)

Consumer Price Index (CPI)

5. Retail Sales

□ Importance: Great ***

□ Influence: Forex, Equity Markets

□ US Release: US retail sales are released monthly, about 15 days after the end of the month reviewed (08:30, New York time).

□ EU Release: Europe’s Retail Trade figure is released monthly between the 3rd day and the 6th day of each month (two months prior) by Eurostat

Retail Sales

6. Trade Balance

□ Importance: Great ***

□ Influence: Forex, Equity Markets

□ US Release: monthly between the 8th and the 12 day of each month (two months prior -each month is released the figure of two months ago) by the US Bureau of Economic Analysis

□ EU Release: Europe’s International Trade figure is released monthly between the 13th and the 18th day of each month (two months prior -each month is released the figure of two months ago)

Trade Balance

7. Purchasing Manufacturing Index (PMI)

□ Importance: Average **

□ Influence: Forex, Equity Markets

□ US PMI Release: Monthly, The first business day of the month (Each Month the previous month data)

□ EU Industrial Production Release: Monthly between the 12th and the 14th day of each month, (two months prior -each month is released the figure of two months ago)

Purchasing Manufacturing Index (PMI)

8. Consumer Confidence Survey

□ Importance: Average **

□ Influence: Forex, Equity Markets

□ US Release: Monthly by the Conference Board

□ EU Release: Monthly by Eurostat (flash estimate between the 21st and 23rd day of each month)

Consumer Confidence Survey


Hotforex Benefits

 

Trading the News

 

Trading the news is maybe the best way to trade intraday any financial markets and especially the Foreign Exchange Market. In general, news-trading requires a good understanding of fundamental analysis, certain day-trading skills and especially elite money-management skills.

During important announcements extreme volatility is a common phenomenon in the price of Financial Assets.

 

The importance of volatility

When we are trading using derivatives the existence of high-volatility adds value to our trading positions. As concerns the options contracts, volatility is even a basic component of the options valuation model {Options Valuation Basic Components: 1.intrinsic value, 2.time to maturity and 3. third is volatility}. Therefore when we are trading volatile markets using derivatives we hold an advantage in our hands.

News-Trading and the 3-Figure Approach

News traders are interested in three figures. The first is the forecasted, the second is the previous figure and the third is the actual figure:

(i) Forecasted Figure (by analysts)

(ii) Previous Figure

(iii) Actual Figure

After a news release, traders are instantly comparing the actual figure (iii) with the previous figure (ii) and the forecasted figure (i) and then they trade. In general:

◙ If an actual figure is better than the forecasted figure traders open long positions (buy the market)

◙ If an actual figure is worst than the expected figure then traders open short positions (sell the market)

 

Seeking for important changes between the Actual and Forecasted Figures

Tiny changes between forecasts and actual figures can not influence neither analysts nor investors. Traders should seek for important changes of 15-20% between the forecast and the actual number in order to trade the market.

Example:

For example if the forecasted GDP growth is 1.0% and the actual GDP growth turns to be 1.2% then all the domestic markets (Forex, equity markets etc) will react very positive and provide a straightforward upward movement. This 0.20% GDP deviation can lead to profitable trading.

Note: The only exemption to this rule is the interest rates. As even tiny changes between the actual and forecasted interest rate level can pinpoint long-term changes in the monetary policies imposed by central banks and therefore can highly influence the Forex and equity markets.

 

What you need to Trade the News

(1) Very good understanding of fundamental analysis and the mechanisms behind economic indicators

(2) An online economic calendar (there are hundreds of free economic calendars available in the web today)

(3) An online broker providing tight spreads and low execution delays ► Forex Brokers Comparison

(4) Certain skills regarding day-trading

(5) Money-Management techniques that will limit your losses in bad days

Starting with an introduction to Economic Indicators and continuing with the major categories of economic indicators.

 

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■ NEWS INDICATORS News Indicators

» Interest Rates

» GDP

» US NFP

» Consumer Price Index

» Retail Sales

» Trade Balance
   

» Purchasing Manufacturing Index

» Consumer Confidence Survey    

 

 

 

 News-Trading and Economic Indicators

Giorgos Protonotarios, financial analyst for WebForex.net (c)