Trading forex is unlike other forms of financial trading. For one, youâ€™re stepping onto the largest financial stage in the world. More transactions take place here in the forex market than in all other financial markets in the world combined. In fact, if you put all of the worldâ€™s equity and futureâ€™s markets together, their combined trading volume would only equal about a quarter of the forex market.
Why is this significant? Because a market this large provides liquidity – so much that cashing out, making trades and, most importantly, making money, is much easier when you always have a buyer. And, in forex, thereâ€™s always a buyer. Always. But, before you jump into this financial pool, you need to know what economic indicators drive the market.
What Are Indicators?
Many currency trading platforms include automated options to help make your trades easier, but they cannot automate the process of reading and deciphering indicators. Indicators are essentially fundamental factors that drive the forex market. Leading indicators include economic factors that change before the economy â€œnoticesâ€ and follows suit.
They usually used to predict economic change. A lagging indicator is an economic factor that changes after the economy has already begun to follow a trend based on previous economic indicators (leading indicators). Lagging indicators are used to confirm that a change has in fact occurred.
One of the largest and best leading indicators is the Gross Domestic Product, or GDP, of a country. This represents all of the goods and services produced by a country, and will often even include government revenues. GDP indicates the pace at which the countryâ€™s economy is growing or deteriorating. Itâ€™s considered the broadest indicator of economic output or growth.
Industrial production is the second leading indicator. Since economies are often primarily driven by manufacturing, accounting for a quarter of all growth in a country. So, industrial production is used as a proxy for the economy. This indicator specifically tracks the production of the nationâ€™s factories, mines, and utilities.
The Institute for Supply Management releases monthly composite index figures for national manufacturing conditions. This indicator shows data on new orders, supplier delivery times, backlogs, production, prices, and even employment. Itâ€™s divided into two sub-indices: manufacturing and non-manufacturing.
Next thereâ€™s the producer price index or â€œPPI.â€ This measures the changes in selling prices that are received by producers in a country in the mining, manufacturing, electric utility, and agricultural industries. The PPIs that are usually used for economic analysis are those for finished goods, but both crude and intermediate goods are also used.
The consumer price index is also a measure used, because it averages the price levels paid by urban consumers for a fixed basket of goods. It reports a change in these prices in over 200 categories. And, because 80 percent of the population in major currency countries are urban consumers, this is seen as an accurate indicator.
Durable goods includes new orders placed with manufacturers for immediate delivery of those goods. Durable products are those which last for over three years, during which services are performed or extended. Companies, and sometimes consumers, put off purchases of durable goods when times are tough, so this is a great indicator of how the economy is doing according to the â€œman in the street.â€
Finally, the employment cost index (ECI) is a measure of the payrolls in a given country. Specifically, it measures the number of jobs at large companies in more than 500 industries in America and 255 metropolitan areas. It counts the number of paid employees working part and full-time in both business and government jobs.
Secondary data like retail sales shows the after-effects of previous indicators. The total receipts of all retail stores from a sample of stores in the country represents the retail trade throughout the nation. It shows spending patterns and is also adjusted for seasonal variation. So, you would expect increased spending during holidays, for example.
Housing starts measures the number of residences that are being built every month. A â€œstartâ€ technically refers to the start of excavation of the foundation for a residential home. Housing is usually the first sector to react to interest rate changes (or, at least, one of the first), so itâ€™s worth paying attention to.
Of all of the economic indicators, major and minor, leading and lagging, itâ€™s hard to pinpoint a single-greatest one because often they rely on each other. So, itâ€™s unhelpful to know the GDP of a country if you donâ€™t also understand manufacturing stats, because GDP often includes government spending. Itâ€™s helpful to be able to have multiple pieces of the puzzle so that you gain a more accurate picture of what, exactly is happening in the country.
Still, if you can look at, and analyse, at least 5 major indicators, youâ€™ll be far ahead of most forex traders looking at just one or who are only using technical analysis for their trades.
Callum Ford was once a new Forex investor himself. Now quite experienced, he likes to help newcomers to the experience by sharing what he has learned on financial and trading blog sites throughout the internet.