Financial markets are unpredictable. However, we often know when some events and data come out and what analysts expect. Using this information, you may try to predict how they will affect the price action.
The most important thing is to be ready and have your SimpleFX accounts funded at their release. In this post, I will explain economic indicators, the assets they affect, and how to use them in trading strategies.
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What is an economic indicator?
The most important economic indicators are released by governments, public institutions, international organizations, or private research institutes.
They give information about the state of a region’s economy, making it possible to conclude the current state of the market.
The most critical economic indicators describe the pace of growth of GDP in a region over time, employment in private and public sectors, the sentiment of businesses and customers, inflation rate, production output, etc.
How to read the indicators?
First, you need to know what symbols they can affect. Critical economic data for the world’s largest economies – the US, EU, and China – have a global impact. They will affect all asset classes. On the other hand, data from smaller economies will impact the price action of their equities, indexes, and currency pairs.
Their influence indicators are divided into low, medium, and high importance.
When checking your economic calendar, always search for information about the expectations. An expectation for essential indicators is the average forecast from the top 50 analysts specializing in the topic.
When a positive indicator has a higher result than the expectations, the markets should react bullishly. For example, if GDP growth in the UK in the second quarter is expected to be 2.9%, any number higher could spark a rally in GBP and UK equities. If it comes lower, the prices are likely to go down.
You should also take into consideration the numbers in the previous period. Let’s retake the British GDP growth. In Q2 2021, it increased by 8.7%, and now the prediction is 2.9%. This suggests that the UK economy is much worse than a year ago. Businesses don’t grow as fast, and people’s earnings and, generally, the sentiment are lower, so riskier assets such as equities or cryptocurrencies have less incentive to grow.
Even if the real data is precisely the same as the forecast, it may move the prices. Just take a look at the interest rate decision by the Federal Reserve in September 2022. For weeks everybody knew that the forecast was 75 basis points. Still, before it happened and after it happened, we could observe increased volatility. Cryptocurrencies went up strongly before the Fed meeting and collapsed after the board decision.
Which asset classes to watch around an economic event?
For global indicators and events, every asset class can be affected. For locals, the effect is usually limited to the country or region.
Events such as interest rate decisions, GDP growth official release, unemployment rate, inflation rate, and manufacturing can affect these asset classes:
- currency pairs
Why do you need to trade before, during, and after the economic releases?
When we want to trade economic events, we must figure out the best way. Should you buy when results are stronger than expected? What asset should we trade for each event? Trading has become highly complex today. It’s tough to make money simply by looking at patterns on a chart. A successful trader must have an advantage over others in the market.
Under pressure, it is insufficient to rely on emotions and memory merely. Interpreting data by only analyzing your thoughts is not a successful strategy in day trading’s fast-paced world. We, as traders, need a system we can depend on when there is no time to research the risks and benefits of each move. It does not matter if you use a paper or computerized system – you need one that works for you.
How to make decisions around economic events?
It is crucial to pick the appropriate instrument when trading economic events. Suppose an inexperienced trader were to trade the GBPUSD after a US or UK Unemployment Rate release. In that case, it could be disastrous, given the inconsistency of the GBP following that type of event. BetterTrader lets users see that trading in SPX500 would be more straightforward regarding volatility and stop loss/profit target selection.
Follow the events you’re interested in
Choose significant events with a high correlation to the market – not just events that inject volatility. Even high volatility at a pre-planned time is insufficient; first, we need the event and the particular market’s strong correlation. Then we must choose a direction and establish our stop loss and profit objective.
Choose your target market(s)
You will not become an expert in every market, and you do not need to be. Having a minuscule amount of advantages over others in just two or three markets is more than enough to succeed as a trader.
I do not only trade one market because developing a skill that will last a while is vital, and needs are constantly changing. However, if you can trade two or three markets, you have a better chance of success.
Another reason to pick more than one market is that there are correlations among them. Often, one market is a leading indicator for the other. You will begin to form your own idea of correlations between them as soon as you acquire screen time with these markets, providing you with even more insights.
Take baby steps
You can get closer to the actual experience if you focus on a few linked events and markets. It would help if you only ventured into the water tentatively after building your system, with a thorough understanding of the markets and the particular event you’re trading in.
We’ve listed the top five things you need to focus on.
You don’t need to trade any noteworthy events – try to master a few specific events rather than many. Keep an eye on the most important events. You don’t have to trade them, but you want to see where everything is going.
A stunning unemployment rate report in the morning may influence market behavior throughout the day. It would help if you didn’t trade based on a one-hour delay in the unemployment rate without first considering it.
Utilizing data to make well-informed decisions is key to coming ahead more often than not – even though no strategy is foolproof.
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