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General Trading Lessons Articles and Tutorials

 
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Bits and pieces of data, both financial and economical, which are published by Government or the private agencies, are called Economic indicators.  This data, which becomes public record, is released regularly so that those in the business of watching the market will be aware of how the economy stands.  Economic indicators are as sacred to those in the financial world as the Bible is to those in the business of religion.  Because there are so many people waiting for this information, economic indicators have the ability to create volume and tend to move the market prices.  You may be surprised to know that one does not need a Masters Degree in Economics to be able to understand the wealth of data that is included in economic indicators; one just needs to understand the guidelines of this data, in order to analyze, organize, track, and then make the right decisions in trading based upon that information.

The first thing you need to always remember is when the next economic indicator will be released.  It is best to make note of it in your date book and marked on the calendar on your desk.

Keeping track of when economic indicators helps you to understand why the market might be fluctuating the way that it is.  For instance, at the beginning of the week and a noteworthy company has been spiraling downwards for several weeks.  Most likely many traders are holding on to a large amount of that company’s short positions. This company will be releasing its employment data at the end of the week, it is probable that the company will see a rally or increase in the market leading up to the end of the week.  This is because traders are letting go of those short positions they had been holding on to, thus causing the increase in the market.   The market is influenced heavily by economic indicators either directly or indirectly, depending upon how traders decide to use the information.

In order for the data to work for your advantage, you must first understand what the data stands for.  You’ll need to know which indicator is specific to the growth of the economy and which indicator is specific to measure the inflation rate.  Once you study this data, you will soon become comfortable in which indicator is measuring which aspect of the economy.

Depending upon which part of the market you are most concerned about, that is the economic indicator you will find most important.  What is important to you may not be as important to the next; it all depends on what your interest is in the market.

It’s important to know which economic indicators the markets are most interested in. For instance; inflation for a certain country might not be of high importance whereas the change in the employment information concerning the growth of that economy might be very important information.  When that information is released it can cause a great deal of instability within the market.

The importance of the information depends upon whether or not it falls as to what the market is expecting.  It is not enough to know when the data will be released but you must also know what experts are predicting for each indicator.  The information is all important but some of it is vitally important, such as knowing the economic costs of rise of .3 percent in the PPI is not nearly as important to your trading decisions as knowing that the market was forecasting the PPI to fall by .1%.  Knowing what you do about the PPI and how it measures prices, the predicted rise could be an indicator of inflation.  The long term affects of that can wait until you take advantage of the opportunities you have for trading that you receive from the data.  Market expectations are published on may sources on the internet and when you find these expectations, always make note of them on your calendar alongside the day the economic indicator will be released. 

While some junior market traders might closely watch the unemployment data, seasoned traders find more value in the data associated to non-farm payrolls.  You must dig deeper than just the headline of the indicator and find the finer points to give you the better advantage.  The most sought after data in the market is that of the ex-food and energy, PPI.  This data is extremely unstable and is revised almost monthly which gives a more accurate measure in changes in producer prices.

It is very important to not be too quick to jump if you should see that an indicator has fallen outside the expectations of the market.  Each economic indicator also has revisions to the indicator that was released previously.  If you should see a substantial rise in this month you need to find the revisions page and see if there are any stated revisions for that indicator.  Thus, an unanticipated rise this month could be the result of a revision to the data the month before. 

The foreign exchange has two sides and this is something you always need to keep in mind.  You might fully understand the data contained within the economic indicator released in the United States or Europe, other countries release similar data as well.  You need to know that those other countries aren’t quite as efficient in releasing this information as the US or UK is.  If you are going to be doing trading of currency of another country, you need to know the data contained within the indicator they release just as well as you know the data in the economic indicator released in the US.

Information concerning economic indicators

• Knowing the impact that indicators have on price in a certain market, the markets of the foreign exchange are quite a challenge and thus have the highest likelihood of profits of all markets.  The proxy for each country is its currency and it’s this currency that establishes its economic well being.  You can understand the economic health of a certain country by watching the indicators associated with it.  It can be a daunting task, but being keen about the data within that country’s economic indicator will help you to make sound choices in the market.

 

Indicators are divided by leading and lagging indicators.

• Leading indicators are used to forecast changes in economy and are economic facts that change well before the actual economy begins to follow a certain trend or pattern.
• Lagging indicators are just the opposite; these are factors that will change after a certain trend or pattern has already begun.


Some Major Economic Indicators

GDP (Gross Domestic Product)

All services and goods, either by foreign or domestic companies is called the GDP.  This indicator will tell you if this country is having economic growth or shrinkage and is generally thought of as the broadest economic indicator of growth and output.

 

Production of Industry

This is the measurement of the actual production a nation’s industries (utilities, factories, and mines) compared to what that nation can produce.  It measures how much is being used and what is left that can be used within that nation’s capacity.  Manufacturing accounts for ¼ of the country’s economy. 

 

PMI (Purchasing Managers Index)

Once called the NAPM is now titled the Institute for Supply Management releases a composite of the national conditions of manufacturing, data on new orders, delivery times of suppliers, inventories, employment, backlogs, orders of exports, prices, and orders of imports.  PMI is divided into two sub-indices such as manufacturing and non-manufacturing.

 

PPI (Producer Price Index)

This is the changes in prices in the manufacturing division.  It is generally used for analysis for crude goods, finished goods, and intermediate goods.  It rates the average change in selling prices that are received from domestic producers such as industries of electric utilities, agriculture, manufacturing, and mining. 

 

CPI (Consumer Price Index)

CPI measures the average price paid by the urban consumer, consisting of 80 percent of the population, for fixed services and goods.  It reports the price changes of 200 different categories.  This also includes certain user taxes and fees associated with prices of certain services and goods.

 

Durable Goods

Durable goods measures orders that are new and placed with domestic manufacturers for future and immediate deliveries of hard goods for factories.  Durable goods are products or goods that last for over three years. 

 

ECI (Employment Cost Index)

Employment payroll, which measures how many jobs there are among 500 industries in 255 metropolitan sites in all 50 states is how the data for ECI is calculated.  The employment estimate is formulated from a survey of bigger businesses and then calculates the number of full time or part time paid workers among government and the nation’s business organizations.

 

Retail Sales

This sales report is compiled of total receipts from retail stores for areas representing a variety of different sizes and types of businesses in the retail area of business throughout the United States.  This is the surest indicator of consumer patterns of spending and is always figured according to the time of year where there are variations between holidays and trading-day differences.  Such items included into this report are nondurable and durable goods sold, and excise and services taxes that are incidental to the sale of the goods.  Sales tax that is received from the consumer is not included in this report.

 

Housing Starts

This report is a measurement of the number of units under residential construction at the beginning of each month.  Start of construction is when the foundation of a home is excavated for that building and that building is primarily comprised of being residential housing.  Housing, which is quite sensitive to interest rates, is one of the first to react when there is a change in the rate of interest.  When there are substantial reactions of star permits compared to the change in the rate of interest, this is a sign that interest rates are close to hitting peak.  In order to fully analyze this report you must first focus on the levels of percentage change from the prior month.  This data is generally released approximately at the middle of the next month.


Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data .

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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