Online forex trading: Fundamental analysis (2) ? The Punch ...

?Kunle Adeyeri
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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 economy?s pulse? and measure the health of a given country and its currency- so it is no surprise that they are religiously followed by almost everyone in the financial markets. But, just like a doctor monitoring a patient?s vital signs, not all stats count equally.

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 in making trading decisions based on this data. Know exactly when each economic indicator will be released through economic calendars on some sites such as www.fxstreet.com, www.forexfactory.com, www.forex.com, etc. Your broker may also provide this on their website or as daily analysis for you. Watching the economic calendar not only helps you consider trades around these events, it helps explain otherwise unanticipated price actions during those periods.

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 economy?s 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. Some sites help traders by placing some signs to show the volatility of the data which may be low, medium or high

Key economic indicators

Gross domestic product

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.

Industrial production

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 is being used (capacity utilisation). The manufacturing sector accounts for one-quarter of the major currencies? economies, so it is critical to watch the health of factories and whether their capacity is being maximised.

Purchasing managers index

The National Association of Purchasing Managers, 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

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

Measures the average price level paid by urban consumers (80 per cent 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

Payroll employment is a measure of the number of jobs at larger companies in more than 500 industries in all 50 US 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.

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 analyse, focus on the percentage change in levels from the previous month. Report is released around the middle of the following month.

Trading strategy tips for economic indicators

A trader will notice that fluctuations begin prior to the news being released. The actual data released is compared against the forecast or at times previous. Positive value or negative value will determine the position to take in the market. Depending on the expected volatility use Limit or pending orders at resistance or support levels prior to the time. Orders could also be stacked around support or resistance level with low take profit pips and at times high volume depending on your equity.

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Source: http://www.punchng.com/am-business/online-forex-trading-fundamental-analysis-2/

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