What are the key economic indicators for traders?
Economic indicators can reveal important news that can affect the markets and impact their performance. As traders, it is our responsibility to make our own forecasts and monitor financial market activity in a way that benefits us. Making economic predictions is largely subjective – we can all use the same indicators but may have countless ways of interpreting them.
Here, we teach you about some of the most important indicators that can shape your trading career, and that may prove invaluable when you are speculating on markets with binary options, call spreads, and knock-outs with Nadex.
What are economic indicators?
Economic indicators are statistics or data used to assess the current or past health of an economy and make financial forecasts. The indicators are typically a good reflection of what is happening in the economy, so when monitored, they can reveal its general strength. They can also be used to predict changes to economies and markets in the future.
As a trader, you don’t necessarily need to carry out all of your economic research using indicators. However, you will find that the more you trade, the more you come to favor particular indicators based on the knowledge they can give you. It’s good to start general, focus on some of the most fundamental economic indicators, then explore further to gain the knowledge you need to trade more confidently.
Types of indicators
These are the economic indicators used to predict the future movements of a market. They are used by governments and officials in their forecasts, as well as by traders who want to make market predictions.
These show the historical performance of a market and won’t be useful until a trend has been established. For traders, they are used to confirm a trend, rather than to predict it.
Top six key economic indicators to watch
These are the six economic indicators that are important to watch to inform your trading decisions. They can help you to understand markets in the short term, making them perfect for trading on Nadex.
Important leading indicators
The stock market. This is directly relevant to stock indices, so it’s an important indicator for traders to understand. Good stock prices can indicate the general health of companies, and decreasing stock prices are less positive. If you are going to trade contracts based on stock indices, you should be aware of this indicator when predicting market movements and deciding whether to buy or sell.
The housing/real estate market. A decline in the housing market is never a good thing for the economy, as homeowner wealth decreases, construction jobs are lost, and the property taxes being paid to the government are less. An economy that’s in a general downturn may have weaker currency, and businesses are also likely to suffer, which can have a direct bearing upon the markets.
Manufacturing statistics. These can be quick and simple indicators showing the health of the economy, as higher production levels can in turn influence gross domestic product (GDP) figures. As manufacturing increases, jobs become available and economies generally grow, so taking a quick look at manufacturing statistics can tell you a lot about likely currency strength and the general state of a country’s finances.
Important lagging indicators
Gross Domestic Product (GDP). This is the monetary measure of goods produced in a country, as well as the services provided. GDP is often compared between countries, and changes can reveal a lot about an economy. Increasing GDP is a sign of a healthy economy, and decreasing GDP is a sign of a shrinking economy. GDP might not directly inform your trades but it’s a good one to be aware of, as the overall health of the economy affects business. This means it has a bearing on forex, stock indices, and commodities markets.
Unemployment rate. More people in work means a stronger economy with more money being spent, and fewer people in work means a weaker economy. This is an important one to watch in relation to US markets, as the weekly jobless claim report can cause shifts.
Consumer price index. Also known as inflation, the consumer price index is important because it is reflective of the general cost of living. A higher rate of inflation means money doesn’t go as far, however it encourages spending and investing to help grow an economy. Rates of inflation can lead to changes in monetary policy from central banks, affecting the value of currencies, so it’s important for forex traders to know about.
How to use these indicators in trading/fundamental analysis
As a trader, you will want to have a general awareness of finance, what is happening in the markets, and what might affect them. This is so you can form predictions and decide on the contracts that you are going to buy or sell.
Economic indicators might not reveal much on their own, but when combined with other methods of analysis, they can form an integral part of your trading strategy. For example, you might decide to watch the forex market around the time that the weekly jobless claim is released. You could apply a number of technical indicators to your charts, including moving averages, support and resistance levels, and Bollinger Bands®.
Consider setting goals, so that if the markets touch certain predefined levels, you will consider placing a trade.
Economic indicators generally fall into two categories:
They can either reflect the state of an economy or may help anticipate market moves, helping traders when making their predictions.
Learn how to use economic indicators and become a better trader. Sign up to one of our live webinars.