Economic indicators together with stats, such as GDP figures, inflation rates, interest rates and employment data releases form the basis of forex trading. A successful trader is one who is always in the know about new releases.
Tracking economic reports can aid forex gurus in pinpointing possible market breakdowns. Central banks may also adjust their interest rates as per economic data.
Leading indicators
Leading indicators are statistics, figures or other data points that could ‘lead’ the way to a change in the economy that economists, investors and business owners may use to predict or plan ahead and mitigate the problems caused by economic/financial market shifts before they happen. Leading indicators are one of the three main different kinds of economic indicators. The other two kinds are coincident and lagging indicators.
Learning the leading indicators and learn how to use them is an important part of making good trading decisions for forex traders. Leading indicators provide early warning signals that can give traders a heads up on what markets might do, or when market reversals may be coming.
Leading economic indicators include Gross Domestic Product (GDP), Consumer Price Index (CPI) and reports on employment such as Nonfarm Payrolls (NFP). They are regularly published by government agencies and central banks to be analysed by traders in assessing the health and performance of economies in general and – more importantly – to predict currency performance on the foreign exchange markets. Given the usefulness of leading indicators, traders cannot afford to ignore them, but likewise they shouldn’t rely solely on these indicators of the health and performance of an economy. They should be part of an integrated trading system to maximise the success of traders.
Lagging indicators
Economic indicators are an important part of forex trading strategies. I would like to clarify the meaning of leading and lagging indicators so that traders can predict market movements and market reversals, reduce risk and formulate better trading strategies. Leading and lagging indicators are helpful for traders. Leading indicators are forward-looking indicators, whereas lagging indicators are backward-looking indicators.
Whether it’s macroeconomic data that measures the general health of an economy – including gross domestic product (GDP) – or microeconomic data that digs into specific industries or sectors, you will likely find them issued on a regular basis by government agencies or financial news sites.
Such markers can make forex prices jump around. For example, when actual GDP data comes out higher than anticipated, currency prices can jitter; when actual data was lower than expected, it can weaken. Such moves provide trading opportunities for those who trade forex.
Coincident indicators
Economic indicators are quantitative measurements that dig out the State of an economy. They are the most crucial measures of any effective economy as they influence traders as well as market moves. The economic indicators can be categorised into three forms – leading, lagging and coincident indicators. The leading indicators tend to give a view of the future economic trends by signalling shifts prior to them taking place. On the other hand, the lagging indicators reflect the past figures, whereas the coincident indicators act as snapshots as to what the economy currently looks like in real time.
Traders scrutinise a host of economic statistics such as Gross Domestic Product (GDP), employment numbers (for example, non-farm payrolls), and inflation measurements. When the economic data is robust, it tends to buoy currencies, while negative economic news tends to weigh them. Higher employment levels create a positive sentiment about more spending and investment decisions.
As an forex trader, you must realize that inflation is one of the most important risks that can affect forex trade. Because high inflation means that consumers buying power decline and investment is stalled; low inflation might make the central bank cut interest rate to boost the spending.
Analyzing and interpreting economic indicators
Economic indicators are one of the key components of foreign exchange trading since they determine what global markets expect and how it will impact the country’s currency price. If traders can predict an event that will impact the price pretty accurately, they will be in a better position to place a profitable trade.
Leading indicators such as stock markets and building permits tend to precede shifts in the economy, letting us know about changes before the official record confirms it. Lagging indicators such as unemployment rates allow us to look in the rear‑view mirror, though it takes some time for them to catch up to past performance and confirm trends.
For example, forex traders should also pay close attention to inflation indicators such as the widely used Consumer Price Index (CPI) as increasing inflation could prepare a central bank to increase interest rates to curb it, which would make the respective country’s currency stronger. On the other hand, low or even negative inflation could result in a depreciated currency so forex traders should understand the potential reactions of their respective central bank to prepare via their trades.
