What are Economic Indicators?

Economic indicators are snippets of financial and economic data published regularly by governmental agencies and the private sector. These statistics help market observers monitor the economys pulse - so its no surprise that theyre religiously followed by almost everyone in the financial markets. 
With so many people poised to react to the same information, economic indicators have tremendous potential to generate volume and to move prices. It might seem like you need an advanced economics degree to parse all this data accurately - but in fact traders need only keep a few simple guidelines in mind to making trading decisions based on this data.

Mark your economic calendars

Know exactly when each economic indicator will be released. You can find these calendars at the New York Federal Reserve Banks site.
Watching the economic calendar not only helps you consider trades around these events, it helps explain otherwise unanticipated price actions during those periods. Consider this scenario: its Monday morning and the USD has been in a tailspin for 3 weeks, with many traders short USD positions as a result. On Friday, however, U.S. employment data is scheduled to be released. If that report looks promising, traders may start unwinding their short positions before Friday, leading to a short-term rally in USD through the week.

What does this data mean for the economy?

You need not understand every nuance of each data release, but you should try to grasp key, large-scale relationships between reports and what they measure in the economy. For example, you should know which indicators measure the economys growth (gross domestic product, or GDP) versus those that measure inflation (PPI, CPI) or employment strength (non-farm payrolls).

Not all economic indicators can move markets

The market often pays more attention to certain indicators under certain conditions - and that focus can change over time. For example, if prices (inflation) are not a crucial issue for a given country, but its economic growth is problematic, traders may pay less attention to inflation data and focus on employment data or GDP reports.

Watch for the unexpected

Often the data itself may not be as important as whether or not it falls within market expectations. If a given report differs widely and unexpectedly from what economists and market pundits were anticipating, market volatility and potential trading opportunities may result. 
At the same time, be careful of pulling the trigger too quickly when an indicator falls outside expectations. Each new economic indicator release contains revisions to previously released data. Heres an example:

Dont get caught up in details

While your macroeconomics professor may appreciate all the nuances of an economic report, traders need to filter data judiciously for their own purposes: making intelligent trading decisions. 
For example, many new traders watch the headlines of the employment report, for example, assuming that new jobs are key to economic growth. That may be true generally, but in trading terms non-farm payrolls is the figure traders watch most closely and therefore has the biggest impact on markets. 
Similarly, PPI measures changes in producer prices generally - but traders tend to watch PPI excluding food and energy as a market driver. Food and energy data tend to be much too volatile and subject to revisions to provide an accurate reading on producer price changes.

There are two sides to every trade

Hopefully this has helped you realize the importance of watching economic indicators - and knowing which data are most likely to move markets and impact currency traders. 
Just remember that no traders knowledge can be complete all the time. You might have a great handle on economic data published in the U.S. - but there are times when data published in Europe or Australia might have surprising impact on your currency market. Doing your homework before trading any currency will help you stay on guard.

Economic indicators: a currencys vital signs

Traders can measure the economic health of a given country (and its currency) through its economic indicators - but, just like a doctor monitoring a patients vital signs, not all stats count equally. Heres a primer of the key economic indicators that often impact currency traders. 
Economic indicators divide into leading and lagging indicators:

• Leading indicators are economic factors that change BEFORE the economy starts to follow a particular trend. Theyre 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. Theyre 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 countrys economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.

Industrial Production 
A chain-weighted measure of the change in the production of the nations factories, mines and utilities, industrial production also measures the countrys industrial capacity and how fully its being used (capacity utilization). 
The manufacturing sector accounts for one-quarter of the major currencies economies, so its 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, 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 
Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is 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 nations business and government establishments. Retail Sales
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 doesnt include sales taxes collected directly from the customer. 

Housing Starts 
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. 

Currency Pairs:

Tailoring Your Technical Approach to Currency "Personalities" 
Every currency pair has qualities unique to it. 
Find out what those qualities are. 
Much has been written about the suitability of technical analysis for trading in the currency markets. While this is undoubtedly true, it can leave traders, particularly those new to the currency markets, with the impression that all technical tools are equally applicable to all major currency pairs. Perhaps most dangerous from the standpoint of profitability, it can also seduce traders into searching for the proverbial silver bullet: that magic technical tool or study that works for all currency pairs, all the time. However, anyone who has traded Forex for any length of time will recognize that, for example, dollar/Yen (USD/JPY) and dollar/Swiss (USD/CHF) trade in distinctly different fashions. 
Why, then, should a one-size-fits-all technical approach be expected to produce steady trading results? Instead, traders are more likely to experience improved results if they recognize the differences between the major currency pairs and employ different technical strategies to them. This article will explore some of the differences between the major currency pairs and suggest technical approaches that are best suited to each pairs behavioral tendencies.

The Biggie
By far the most actively traded currency pair is euro/dollar (EUR/USD), accounting for 28 percent of daily global volume in the most recent Bank for International Settlements (BIS) survey of currency market activity. EUR/USD receives further interest from volume generated by the Euro-crosses (e.g. euro/British pound (EUR/GBP), EUR/CHF and EUR/JPY, and this interest tends to be contrary to the underlying U.S. dollar direction. For example, in a U.S. dollar-negative environment, the Euro will have an underlying bid stemming from overall U.S. dollar selling. However, less liquid dollar pairs (e.g. USD/CHF) will be sold through the more liquid Euro crosses, in this case resulting in EUR/CHF selling, which introduces a Euro offer into the EUR/USD market. 
This two-way interest tends to slow Euro movements relative to other major dollar pairs and makes it an attractive market for short-term traders, who can exploit "backing and filling." On the other hand, this depth of liquidity also means EUR/USD tends to experience prolonged, seemingly inconclusive tests of technical levels, whether generated by trendline analysis or Fibonacci/Elliott wave calculations. This suggests breakout traders need to allow for a greater margin of error: 20-30 pips. (A pip is the smallest increment in which a foreign currency can trade with respect to identifying breaks of technical levels.) Another way to gauge whether EUR/USD is breaking out is to look to the less liquid USD/CHF and GBP/USD. If these pairs have broken equivalent technical levels, for example recent daily highs, then EUR/USD is likely to do the same after a lag. If "Swissy" and "Cable" (popular name for British pound) are stalling at those levels, then EUR/USD will likely fail as well.

Customize Your Settings
In terms of technical studies, the overwhelming depth of EUR/USD suggests that momentum oscillators are well-suited to trading the euro, but traders should consider adjusting the studies parameters (increase time periods) to account for the relatively plodding, back-and-fill movements of EUR/USD. See Figure 1. In this sense, reliance on very short-term indicators (less than 30 minutes) exposes traders to an increased likelihood of "whipsaw" movements. Moving average convergence divergence (MACD) as a momentum study is well-suited to EUR/USD, particularly because it utilizes exponential moving averages (greater weight to more recent prices, less to old prices) in conjunction with a third moving average, resulting in fewer false crossovers. Short-term (hourly) momentum divergences routinely occur in EUR/USD, but they need to be confirmed by breaks of price levels identified though trendline analysis to suggest an actionable trade. When larger moves are underway, traders are also likely to find the directional movement indicator (DMI) system useful for confirming whether a trend is in place, in which case momentum readings should be discounted, and might choose to rely on DI+/DI- crossovers for additional trade entry signals.

Second Place
The next most actively traded currency pair is USD/JPY, which accounted for 17 percent of daily global volume in the 2004 BIS survey of currency market turnover. USD/JPY has traditionally been the most politically sensitive currency pair, with successive U.S. governments using the exchange rate as a lever in trade negotiations with Japan. While China has recently replaced Japan as the Asian market evoking U.S. trade tensions, USD/JPY still acts as a regional currency proxy for China and other less-liquid, highly regulated Asian currencies. In this sense, USD/JPY is frequently prone to extended trending periods as trade or regional political themes (e.g. yuan revaluation) play out. 
For day-to-day trading, however, the most significant feature of USD/JPY is the heavy influence exerted by Japanese institutional investors and asset managers. Due to a culture of intra-Japanese collegiality, including extensive position and strategy information-sharing, Japanese asset managers frequently act in the same direction on the yen in the currency market. In concrete terms, this frequently manifests itself in clusters of orders at similar price or technical levels, which then reinforce those levels as points of support or resistance. Once these levels are breached, similar clusters of stop loss orders are frequently just behind, which in turn fuel the breakout. Also, as the Japanese investment community moves en masse into a particular trade, they tend to drive the market away from themselves for periods of time, all the while adjusting their orders to the new price levels, for instance raising limit buy orders as the price rises. 
An alternate tactic frequently employed by Japanese asset managers is to stagger orders to take advantage of any short-term reversals in the direction of the larger trend. For example, if USD/JPY is at 115.00 and trending higher, USD/JPY buying orders would be placed at arbitrary price points, such as 114.75, 114.50, 114.25 and 114.00, to take advantage of any pullback in the broader trend. This also helps explain why USD/JPY frequently encounters support or resistance at numerically round levels, even though there may be no other corresponding technical significance.

Take A Look at Trendlines
Turning to the technical side of USD/JPY, the foregoing discussion suggests trendline analysis as perhaps the most significant technical tool for trading USD/JPY. Because of the clustering of Japanese institutional orders around technical or price levels, USD/JPY tends to experience fewer false breaks of trendlines. For example, large-scale selling interest at technical resistance will need to be absorbed if the technical level is to be broken. This is likely to happen only if a larger market move is unfolding, and this suggests any break will be sustained. This makes USD/JPY attractive for breakout traders who employ stop-loss entry orders on breaks of trendline support or resistance. Short-term trendlines, such as hourly or 15 minutes, can be used effectively, but traders need to operate on a similarly short-term basis; daily closing levels hold the most meaning in USD/JPY. In terms of chart analysis, Japanese institutional asset managers rely heavily on candlestick charts (which depend heavily on daily close levels) and traders would be well-advised to learn to recognize major candlestick patterns, such as doji, hanging man, tweezer tops/bottoms and the like. See Figure 2. When it comes to significant trend reversals or pauses, daily close (5 p.m. EST), candlesticks can be highly reliable leading indicators. 


The yen discussion above also highlighted the factors behind the propensity of USD/JPY to trend over the medium-term (multiweek). This facet suggests traders should look to trend following tools such as moving averages (21- and 55-day periods are heavily used), DMI, and Parabolic SAR. (This refers to J. Welles Wilder Jr.s Parabolic System. SAR stands for stop and reverse.) Momentum oscillators such as the relative strength index (RSI), MACD or stochastics should generally be avoided, especially intraday, due to the trending and institutional nature driving USD/JPY. While a momentum indicator may reverse course, typically suggesting a potential trade, price action often fails to reverse enough to make the trade worthwhile due to underlying institutional interest. Instead of reversing along with momentum, USD/JPY price action will frequently settle into a sideways range, allowing momentum studies to continue to unwind, until the underlying trend resumes. Finally, Ichimoku analysis (roughly translated as one-glance cloud chart) is another largely Japanese-specific trend identification system that highlights trends and major reversals. 

A Look At Some Illiquid Currencies
Having looked at the two most heavily traded currency pairs, lets now examine two of the least liquid major currency pairs, USD/CHF and GBP/USD, which pose special challenges to technically oriented traders. The so-called Swissy holds a place among the major currency pairs due to Switzerlands unique status as a global investment haven; estimates are that nearly one-third of the world’s private assets are held in Switzerland. The Swiss franc has also acted historically as a so-called "safe-haven" currency alternative to the U.S. dollar in times of geo-political uncertainty, but this dimension has largely faded since the end of the Cold War. Today, USD/CHF trades mostly based on overall U.S. dollar sentiment, as opposed to Swiss-based economic fundamentals. The Swiss National Bank (SNB) is primarily concerned with the francs value relative to the euro, since the vast majority of Swiss trade is with the European Union, and Swiss fundamental developments are primarily reflected in the EUR/CHF cross rate. 
Liquidity in USD/CHF is never very good, and this makes it a favorite "whipping horse" for hedge funds and other speculative interests looking to maximize the bang for their buck. The lower liquidity and higher volatility of Swissy also makes it a significant leading indicator for major U.S. dollar movements. Figure 3 illustrates an example of a recent break of major daily trendline support in USD/CHF that took place a full day before EUR/USD and USD/JPY broke equivalent levels. Swissy will also lead the way in shorter-term movements, but the overall volatility and general jitteriness of USD/CHF price action makes false breaks of technical levels common. These false breaks are frequently stop-loss driven and it is not unusual for prices to trade 15-25 points through a support/resistance level before reversing after the stop losses have been triggered. In strong directional moves, USD/CHF price action tends toward extreme one-way traffic, with minimal backing and filling in comparison to EUR/USD. 

Cable (GBP/USD), or sterling, also suffers from relatively poor liquidity and this is in part due to its higher pip value (U.S. dollars) and the relatively Euro-centric basis of U.K. trade. Sterling shares many of the same trading characteristics of Swiss outlined just above, but Cable will also react sharply to U.K. fundamental data as well as to U.S. news. Sterling price action will also display extreme one-way tendencies during larger moves, as traders caught on the wrong side chase the illiquid market to the extremes. 

Focus On Risk Management
The volatility and illiquidity of Swiss and sterling suggests traders need to use a more proactive overall approach to trading these pairs, particularly concerning risk management (i.e. position size in relation to stop levels). With regard to technical tools, the tendency for both pairs to make short-term false breaks of chart levels suggests breakout traders need to be particularly disciplined concerning stop entry levels and should consider a greater margin of error on the order of 30-35 points. In this sense, trend line analysis of periods less than an hour tends to generate more noise than tradable break points, so a focus on longer time periods (four hours-daily) is likely to be more successful in identifying meaningful breaks. By the same token, once a breakout occurs, surpassing the margin of error, the ensuing one-way price action favors traders who are quick on the trigger, and this suggests employing resting stop-loss entry orders to reduce slippage. For those positioned with a move, trailing stops with an acceleration factor, such as parabolic SAR, are well suited to riding out directional volatility until a price reversal signals an exit. Of course, placing contingent orders may not necessarily limit your losses. 
The volatility inherent in Cable and Swiss makes the use of short-term (hourly and shorter) momentum oscillators problematic, due to both false crossovers and divergences between price/momentum that frequently occur in these time frames. Longer-period oscillators (four hours and more) are best used to highlight potential reversals or divergent price action, but volatility discourages initiating trades based on these alone. Instead, momentum signals need to be confirmed by other indicators, such as breaks of trend lines, Fibonacci retracements or parabolic levels, before a trade is initiated.

 Try A Larger Retracement
With regard to Fibonacci retracement levels, the greater volatility of Cable and Swiss frequently sees them exceed 61.8-percent retracements, only to stall later at the 76.4-percent level, by which time most short-term Elliott wave followers have been stopped out. Short-term spike reversals of greater than 30 points also serve as a reliable way to identify when a directional surge, especially intraday, is completed, and these can be used as both profit taking and counter-trend trading signals. For counter-trend, corrective trades based on spike reversals, stops should be placed slightly beyond the extreme of the spike low/high. A final technical study that is well suited to the explosiveness of Swiss and sterling is the Williams %R, an overbought/oversold momentum indicator, which frequently acts as a leading indicator of price reversals. The overbought/oversold bands should be adjusted to -10/-90 to fit the higher volatility of Cable and Swiss. As with all overbought/oversold studies, however, price action needs to reverse course first before trades are initiated. 

Its Not One Size Fits All
Traders who seek to apply technical trading approaches to the currency market should be aware of the differences in the trading characteristics of the major currency pairs. Just because the euro and the pound are both traded against the dollar does not mean they will trade identically to each other. A more thorough understanding of the various market traits of currencies suggests that certain technical tools are better suited to some currency pairs than others. A currency-specific approach to applying technical analysis is more likely to produce successful results than a one-size-fits-all application across all currency pairs.

Economic Indicators

 1. Gross Domestic Product (GDP)

the most important indicator is the GDP report. Basically, the GDP is the widest measure of the state of the economy. The figure is released at 8:30 am EST on the last day of each quarter and reflects the previous quarter. The GDP is an aggregated monetary value of all the goods and services produced by the entire economy during a quarter (excluding international activity). The key number to look for is the growth rate of GDP. Generally, the U.S. economy grows at around 2.5-3% per year and deviations from this range can prove to be rather influential. Growth above this level is often thought to be unsustainable and a precursor to high inflation. So, the Fed usually responds by trying to slow down an "overheated" economy. Growth below this range (and especially negative growth) means that the economy is running slowly, which can lead to increased unemployment and lower spending. It is worth noting that each initial GDP report will be revised twice before the final figure is settled upon: the "advance" report is followed by the "preliminary" report about a month later and a final report a month after that. Significant revisions to the advance number can cause additional ripples through the markets. The GDP numbers are reported in two forms: current dollar and constant dollar. Current dollar GDP is calculated using today's dollars and makes comparisons between time periods difficult because of the effects of inflation. Constant dollar GDP solves this problem by converting the current information into some standard era dollar, such as 1997 dollars. This process factors out the effects of inflation and allows easy comparisons between periods. Do not confuse Gross Domestic Product with Gross National Product (GNP). GDP includes only goods and services produced within the geographic boundaries of the U.S., regardless of the producer's nationality. GNP does not include goods and services produced by foreign enterprises, but does include goods and services produced by U.S. firms operating in foreign countries. For example, if a U.S. firm was operating a chain of stores in France, the goods and services produced by those stores would not be included in the GDP, but would be included in the GNP. As the global economy grows, the difference in GDP and GNP is decreasing for developed countries like the U.S. But for smaller, developing countries, the difference can be substantial. For the latest report, visit the Bureau of Economic Analysis website.

2. Unemployment Rate

A measure of unemployed workers (above 18 years) in relation to the total labor force Unemployment Rate is calculated monthly by surveying a random sample of about 60,000 households, 375,000 plants. It is one of the key macroeconomic indicators. Only unemployed are taken into account, that is jobless people, which actively look for work. The unemployment rate is calculated by dividing the number of unemployed by the number in the labor force, where the labor force is the sum of the unemployed and the employed. The natural rate of unemployment is considered to make about 4-5 of the labour force. It is treated as an indicator of possible inflationary pressure through wages increase. Salary is considered to grow faster with low unemployment rate, especially in case inflation acceleration is expected. In case rates hikes are expected unemployment rate decrease triggers USD advance

3- Consumer Confidence Index

Consumer confidence is considered a crucial part of the economic picture. Released on the last Tuesday of the month at 10 am EST, the report measures how confident consumers feel about the state of the economy and their spending power. The idea is that the more confident people feel about the stability of their incomes, the more likely they are to make purchases. The Consumer Confidence Report uses about 5,000 households as a sample population and even measures the number of help wanted ads in newspapers to gain a sense of the state of the labor market. Many analysts believe that high consumer confidence can cure a lot of what ails an economy. When most data points to a slumping economy, high consumer confidence and consistent spending may help soften the blow or power a recovery. For the latest release, visit the Conference Board Company.

4. Consumer Price Index (CPI)

The CPI is the most widely used measure of inflation. The report is released at 8:30 am EST around the 15th of each month and reflects the previous month's data. The CPI measures the change in the cost of a bundle of consumer goods and services. The bundle includes about 200 types of goods and thousands of actual products, ranging from foods and energy to expensive consumer goods. The prices are measured by taking a sample of prices at different stores. In addition to the overall CPI number, it is important to also look at the "core rate." The core rate excludes volatile goods like food and energy and gives a closer measure of real inflation. Most reports of the CPI numbers will include both the overall and the core numbers. The CPI is also important because it is used to adjust the annual changes to Social Security payments. There has been much debate about how well the CPI measures inflation, and some feel that it is an imperfect way to track rising prices. To see the latest report, visit the Bureau of Labor Statistics.

5. Non-Farm Payrolls

Non-farm Payrolls represent the total number of paid US workers of any business, excluding the following employees: general government employees, employees of nonprofit organizations that provide assistance to individuals, farm employees. About 400 thousand of companies and 50 thousand of home economics are estimated. These data are released monthly, revised in accordance with seasonal fluctuations, etc. Non-farm Payrolls, Unemployment Rate, Average Workweek and Hourly Earnings are used for inflation rate specification, that is for rates changes also. High rates of growth of the indicator stimulate economic growth acceleration.