Know the Data That Affects the Market
The Key to Fundamental Forex Trading
Understanding the significance and the meaning of the economic data can help you make smarter and more profitable trades. Below are some of the primary pieces of data that successful Forex traders follow.
What are the Key Indicators?
Forex Traders can gauge the financial health of a given country (and its currency) through its economic data. But, just like a doctor monitoring a patient's vital signs, the information is not equal in terms of its impact. Here is a short description of the key economic indicators that often affect currency trads.
Economic indicators divide into leading and lagging indicators:
- Leading indicators are economic factors that change before the economy starts to follow a particular trend. They're used to predict changes in the economy.
- Lagging indicators are economic factors that change after the economy has already begun to follow a particular trend. They're used to confirm changes in the economy.
Major Economic Indicators
Gross Domestic Product (GDP)
The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.
A chain-weighted measure of the change in the production of the nation's factories, mines and utilities, industrial production also measures the country's industrial capacity and how fully it's being used (capacity utilization).
The manufacturing sector accounts for one-quarter of the major currencies' economies, so it's critical to watch the health of factories and whether their capacity is being maximized.
Purchasing Managers Index (PMI)
The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions. The index includes data on new orders, production, supplier delivery times, backlogs, inventories, prices, and employment, export and import orders. It is divided into manufacturing and non-manufacturing sub-indices.
Producer Price Index (PPI)
Measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries.
The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.
Consumer Price Index (CPI)
Measures the average price level paid by urban consumers (80% of the population in major currency countries) for a fixed basket of goods and services. It reports price changes in over 200 categories.
The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.
Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. Durable goods are a product that lasts over three years, during which its services are extended.
Companies and consumers sometimes put off purchases of durable goods during tough economic times - so this figure is a useful measure of certain kinds of customer demand.
Employment Cost Index (ECI)
Payroll employment is a measure of the number of jobs at larger companies in more than 500 industries in all 50 U.S. states and 255 metropolitan areas. ECI counts the number of paid employees working part-time or full-time in the nation's business and government establishments.
Measures total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences.
Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise. It doesn't include sales taxes collected directly from the customer.
Measures the number of residential units on which construction is begun each month. A "start" refers to excavation of the foundation of a residential home.
Housing is usually one of the first sectors to react to interest rate changes. Significant reaction of start/permits to changing interest rates signals interest rates are nearing trough or peak. To analyze, focus on the percentage change in levels from the previous month. Report is released around the middle of the following month.