You probably have an idea of what forex economic indicators are.
Especially if you went through forex economics 2.
By now, you know how important Central Banks are in the determination of exchange rates (currency pair price).
And you also know how important demand and supply of each currency is (see forex economics 1).
But what does this have to do with forex economic indicators?
An economic indicator is just a number or piece of data. People use these to see how the economy is doing.
For example, if GDP is growing, the economy is growing (good).
If GDP is falling, the economy is shrinking (noooo).
Maybe you’ve heard this before:
“When you buy currency, you’re betting on a country and its economy”.
“It’s like buying shares of a country, you own a small part of it”.
Which Share is going up?
While these statements over-simplify what’s going on, there are gems of truth in them.
Therefore, what can we do to determine which country we’re going to buy from?
Yep, this is where forex economic indicators come in.
Note: there are hundreds if not thousands of economic indicators, we include “forex” before it because we’re referring to the smaller group of indicators most used by forex traders.
You might think the subheads in this page will be different from those in forex technical indicators, but we can also separate forex economic indicators by the timing in which they operate.
So without further ado:
If you remember well, leading indicators are those which signal the start of a new trend.
Unlike technical indicators though, we don’t really have 100% clear buy or sell signals from economic data.
Paradoxically though, some market agents (including traders) make money consistently by following leading economic indicators.
The trick’s in how accurately you can interpret the signals hidden in these.
This is why some forex traders swear on the importance of finding a solid fundamental analyst, if you follow their advice, you’re golden!
Always remember to use sound money management techniques.
Even great analysts will be wrong sometimes (ouch). So watch your back.
Of course, knowing what to trade and when is just one side of the coin.
You need to be a master of your trading psychology to execute trades well.
What’s an example of a leading forex economic indicator?
The Beige Book.
This is just a summary of economic conditions written by the Federal Reserve (you should know this by now, but this is the Central Bank of the United States. What’s a Central Bank? See 1st paragraph for link).
So why is this book predictive? Doesn’t it go through current economic conditions?
Yes, but that’s the key.
When thinking about future policy, The Federal Reserve (FED) considers conditions now.
And based on how the economy is doing, they will foreshadow how they will possibly act in the future.
To the untrained eye, this foreshadowing can go unnoticed since it’s subtle.
As subtle as changing wording from “in the future” to “in the near future”. Or adding a “may” before an action statement.
This may sound obvious when put this way, but try finding this in a huge document written in a passionless tone.
It takes a special kind of breed to spot these. Even when you know which sections of the report to focus on.
So that’s a good basic preview of leading forex economic indicators (what a mouthful).
Just like lagging technical indicators, these validate a trend once it’s formed.
The best example of this is Gross Domestic Product (GDP).
GDP numbers are published several months after the fact (you’ll grow a mustache waiting).
So there isn’t much predictive power by itself.
However, if the number defies the expectations, it will cause some waves.
For example, a lower than expected GDP will make everyone more cautious about the economy.
Forecasts will be revised down, and economic activity will follow suit (business adapt to this new information).
Overall though, lagging economic indicators should be taken into consideration when the markets are obsessed with them.
This is true for any indicator.
What is this?
Indicators which are published once a month, bi-weekly, or even weekly.
In essence, this data is so readily available, traders can act on them regularly.
An example is the Employment Situation Report in the United States.
Why is this tradeable?
The FED (and thus the market) can be wary of the next numbers.
Maybe the FED stated (or foreshadowed) it will reduce money supply if employment numbers are strong.
Reduced money supple will pressure the dollar to go up vs other currencies, which may present trading opportunities to savvy traders.
If you’re really savvy, you’ll have a strong analyst recommending which way things will go before the report comes out.
If you place your trade accordingly and the prediction turned true, congrats, you have a high probability trade (you can still screw it, I know, trading is hard).
In practice, it’s not as simple (I keep repeating myself, I know), but that’s the gist of it.
I’d like to say coincidental forex economic indicators are the most useful. They’re more frequent, so you get more trade opportunities right?
But that would be wrong.
In order to trade effectively, you have to know everything that can impact your trade (or at least, as much as you can).
Lagging and leading indicators set the context in which you’re trading.
So you must be aware of what the market is paying attention to and what threats and opportunities await behind the bush.
I hope this has been useful to you.
See you soon,
The Forex EconomistHome > Forex Indicators > Forex Economic Indicators
Sep 12, 17 09:09 AM
Learn what you need to know about Forex audio squawk here.
Sep 11, 17 09:48 AM
GBP (pound) traders what can you expect from the Bank of England's MPC vote this Thursday, Sep 2017? Click to find out.
Aug 21, 17 04:41 PM
Three of the eight major currencies are commodity currency. But what is that? Which are those currencies, and how can we trade them? Click to find out.