In this article we explain how to use economic data in forex trading. The following indicators in forex are beneficial to a more profitable trading in forex. We take a look at some of the economic data that can be used as indicators in forex. Remember that economic indicators usually contain revisions to previous data sets. So although the importance of figures lies in the extent to which they fall outside market expectations, be aware that an unexpected rise could be the result of a downward revision to the previous month. So look at revisions to older data before you use this as a basis for making a trade.
Consumer Confidence Index (CCI)
This is published on a monthly basis in the USA and is seen as one of the most accurate indicators of confidence. When consumers are more confident, and therefore spend more money, it is taken as a sign that the economy is in good shape with jobs on the increase.
Changes in non-farm payrolls (NFP)
This too is published on a monthly basis and is used to help government policy-makers to determine the current state of the economy and predict future levels of economic activity. It is a very big market mover.
This measures the difference between the value of goods and services that a country exports and those it imports. It is seen as an extremely big market mover.
This tracks how many new single-family homes or other residential buildings were constructed in the course of the month. It is not a big market mover, but it is seen as an accurate predictor of trends in the economy.
Employment Cost Index (ECI)
This is produced on a quarterly basis and tracks movements in the costs of labor at all levels. It is quite an important market mover since it increasing wage pressures are thought to indicate increasing inflation.
Tips to bear in mind while using economic indicators
- Make sure you are clear which aspect of the country’s economy is being revealed in the figures – e.g. which measure the growth of the economy (GDP), inflation(PPI, CPI), employment (non-farm payrolls) etc.
- Understand which economic indicators have the greatest potential to move markets.
- Be clear which economic issues are the most crucial for the country you are dealing with. For instance, if inflation is a more important issue than economic growth in that country, inflation figures will have more effect on the market than figures that show GDP.
- This point is very crucial. Remember that the numerical value of an indicator is not as important as the extent to which the figures have been anticipated by the market. The market expectations for all releases are posted on various sources on the Internet and you need to put these on your calendar along with the release dates.
- Concentrate on the finer points of the data, rather than the headline figure of each set of data. For example, the PPI (Producer Price Index) measures changers in producer prices of different commodities. However, experienced traders will know not to pay so much attention to the food and energy components of the data set. This is because they are aware that these components are so volatile that they do not provide an accurate picture of economic conditions.
Never forget that there are two sides to a trade in Forex trading. You always trade one currency against another. Therefore you must pay attention to the economic data from both of the countries whose currencies you are trading. Remember that not all countries are as efficient as the USA or Europe in releasing their economic information so you have to be careful about judging how much weight in the market the data from each country will carry. Always do your homework along with using the economic data in forex trading.