BlogIndicators

Forex Trading Indicators

Whilst many forex traders claim to only use technical analysis for their forex trading decisions, stating that ‘the price is everythinng’, it is a fact of life that the fundamental and economic news, does affect the forex markets whether we like it or not, and to ignore it completely seems absurd. Indeed scratch beneath the surface of most technical traders and you will almost certainly find that they do indeed follow the news releases, whilst still professing to be a pure chartist ! For myself, I am a technical trader primarily, but make no bones of the fact that I follow the economic news closely to help me in timing my forex trading decisions. So what are the forex trading indicators that I watch, how do these provide a snapshot of the economic health of a country or nation, and why do these releases influence the forex markets in the way they do?

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Whilst foreign exchange rates seem a superficially simple derivatives market to trade, beneath this lies a complex web of economic interdependency’s and influences, all of which overlap and interconnect in different ways, and in order to arrive at any meaningful analysis for the future of forex rates, we need to consider the five main areas of economic news and fundamental news as follows :

  • Fiscal policy ( the government’s influence on the business cycle )
  • Monetary policy ( actions by Central Banks )
  • Political decisisons and developments
  • Crisis situations
  • Future prospects

The overall state of a national economy and its developmental tendencies, is also known as the business or economic cycle, which more precisely can be described as fluctuations around a long term growth rate. Economic development and growth does not move in a straight line, but rather a series of steps which have a cyclical nature which we all know well, and which is often referred to as the boom and bust cycle. A boom phase is generally characterised with higher growth rates in economic performance, increasing employment, and a higher GDP, whilst the bust cycle exhibits lower growth rates, declining employment, and GDP which is stagnating.

In order to assess an economy, its current state and future prospects market analysts use economic or business cycle indicators to provide a snapshot which allow a quantitative analysis to be made of the economy, and thus arrive at an projection of the future for the country as a whole, which in turn will have an impact on the nations currency as a result. As forex traders we therefore need to have a solid understanding of these indicators, what the data means, and how it is likely to affect the forex markets as a result. These economic indicators are released every day, and coupled with the broader political decisions, and any sudden crisis, either financial or otherwise, the forex markets are always in a state of nervous expectation waiting for the next event to unfold.

In general, forex trading indicators can be grouped into three broad categories according to the subject that they cover as follows:

  • Leading indicators – these are trading  indicators which offer a clue to the future economic cycle and therefore are particularly useful to us as forex traders, in other words they lead the economy. Typically these would include such indicators as New Factory Orders, or the Purchasing Managers Index, both of which are US indicators.
  • Coincident indicators – these indicators move in tandem with the economy and therefore neither lead or lag, and simply confirm the current economic state of the country as a result. Typical examples here would be the Industrial Production Index, or Capacity Utilisation.
  • Lagging indicators – the biggest group of indicators. These provide an historical view on the economy and typically data used to compile the analysis will be anywhere from one month to four months old. Some of these indicators are released in a preliminary format, and then revised in a series of amendments later in the month or quarter. These indicators tend to have a volatile impact with the preliminary release, and reduced effect later, as the news has already been absorbed and factored into the forex markets, and therefore lacks the surprise element.

Of the above forex trading indicators, we then have two further groups which simply specify whether the indicator is a quantitive one, or a qualitive one, and by this we mean whether the indicator is based on statistical analysis of a data set, or simply on a survey using questions and answers. The later of these is surprisingly common and released endlessly to the forex markets, generally referred to as sentiment indicators. Typically a group is surveyed monthly or quarterly to assess whether economic sentiment is improving, flat or falling. Some of these indicators are more important than others, but all will have an effect on the market when released, and all are measured against both the previous release and the forecast, just as for the more important quantitative indicators such as GDP and RPI.

Since there are always two currencies involved in any forex pair, any economic indicator will have an impact on two regions. Most indicators have a cross border commonality, in order to allow comparison between two differing countries, although the timing and precise calculations may differ. Less important indicators may be country specific. I have covered all the major indicators which appear regularly and in order to simply this as much as possible I have concentrated on the US markets and US indicators, but many of these will be found across the globe and have the same influence and meaning as a result.

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