News-Trading and Economic Indicators
Economic indicators are periodic economic statistics that provide an insight regarding the performance of an economy during a certain time-period. Any change in the macroeconomic conditions can trigger strong movements in the financial markets, and that means profit opportunities for currency traders. News trading is the process of linking macroeconomic events to strong price movements.
Categorizing Economic Indicators by their Release-Time
There are three types based on their timing:
1. Leading Indicator (Before the Economy)
Leading indicators change before the economy is changing. A leading indicator can be used as a signal of new upcoming macro conditions. For example, the Consumer Confidence Index and the Home Sales Report.
2. Coincident Indicator (At the same time)
A Coincident Indicator changes at the same time as the economy (i.e. Gross Domestic Product).
3. Lagged Indicator (After the Economy)
A lagged indicator is changing 6-10 months after the economy is changing (i.e. the unemployment figures).
Categorizing Economic Indicators by their Attributes
There are three main attributes of Economic Indicators based on their relation to an economy’s performance:
(i) Procyclic Indicator
A Procyclic Indicator moves in the same direction as an economy (i.e. Gross Domestic Product).
(ii) Countercyclical Indicator
A Countercyclical Indicator moves in the opposite direction as an economy (i.e. the unemployment figures).
(iii) Acyclic Indicator
An Acyclic Indicator has no relation to the economy.
The Key Economic Indicators for Currency Trading
Here is a list of some of the most important economic indicators when trading Forex currencies:
1. Interest Rates
US: US interest rates decisions are made by FED 8 times per year
ECB: The European Central Bank meets monthly to decide about its interest rates policy (Between the 10th and the 14th day of each month)
2. Gross Domestic Product
US: US Advance GDP is released 1 month after the end of the quarter by the Bureau of Economic Analysis (BEA). The final GDP is released 3 months after the quarter’s end. GDP is released during the last week of each month.
Europe: Monthly by Eurostat
US NFP: The NFP report is released on the 1st Friday of every month by the US Bureau of Labor Statistics.
EU Unemployment: Monthly by Eurostat, usually during the last day of each month or the first day of the next month
4. Consumer Price Index / Inflation Reports
US CPI: The CPI report is released on a monthly basis by the US Bureau of Labor Statistics between the 15th and the 22nd day of each month
Europe’s (HICP): Eurostat announces the HICP Harmonised Indices of Consumer Prices) each month:
- The HICP of the previous month (middle of the month)
- A flash estimate of the current month (end of each month)
5. Retail Sales
US: US retail sales are released monthly, about 15 days after the end of the month reviewed (08:30, New York time)
EU: Europe’s Retail Trade figure is released monthly between the 3rd day and the 6th day of each month (two months prior) by Eurostat
6. Trade Balance
US: monthly between the 8th and the 12th day of each month (two months prior -each month is released the figure of two months ago) by the US Bureau of Economic Analysis
EU: Europe’s International Trade figure is released monthly between the 13th and the 18th day of each month (two months prior -each month EU releases the figure of two months ago)
7. Purchasing Manufacturing Index (PMI)
US: Monthly, The first business day of the month (Each Month the previous month's data)
EU: Monthly between the 12th and the 14th day of each month, (two months prior -each month EU releases the figure of two months ago)
8. Consumer Confidence Survey
US: Monthly by the Conference Board
EU: Monthly by Eurostat (flash estimate between the 21st and 23rd day of each month)
Trading the News and the Importance of Volatility
Trading the news is maybe the best way to trade intraday in any financial market, especially the Foreign Exchange Market. In general, news trading requires a good understanding of fundamental analysis, certain day-trading skills, and especially elite money-management skills.
During important announcements, extreme volatility is a common phenomenon in the price of Financial Assets. When we are trading using derivatives the existence of high volatility adds value to our trading positions.
In options trading, volatility is one of the three basic components of the options valuation model. Therefore when we are trading volatile markets using derivatives we hold an advantage in our hands.
■ Options Valuation 3 Basic Components: 1. Intrinsic Value, 2. Time to Maturity, and 3. Volatility
News-Trading and the 3-Figure Approach
News traders are interested in three figures. The first is the forecast, the second is the previous figure, and the third is the actual figure:
(i) Forecasted Figure (by analysts)
(ii) Previous Figure
(iii) Actual Figure
After a news release, traders are instantly comparing the actual figure (iii) with the previous figure (ii) and the forecasted figure (i) and then they trade. In general:
◙ If an actual figure is better than the forecasted figure traders open long positions (buy the market)
◙ If an actual figure is worst than the expected figure then traders open short positions (sell the market)
Seeking important changes between the Actual and Forecasted Figures
Tiny changes in forecasts and actual figures can influence neither analysts nor investors. Traders should seek important changes of 15-20% between the forecast and the actual number in order to trade the market.
For example, if the forecasted GDP growth is 1.0% and the actual GDP growth turns to be 1.2% then all the domestic markets (Forex, equity markets, etc) will react very positively and provide a straightforward upward movement. This 0.20% GDP deviation can lead to profitable trading.
Note: The only exemption to this rule is the interest rates. As even tiny changes between the actual and forecasted interest rate level can pinpoint long-term changes in the monetary policies imposed by central banks and therefore can highly influence the Forex and equity markets.
What you need to Trade the News
(1) A very good understanding of fundamental conditions and the mechanism behind the influence of economic indicators
(2) An online economic calendar (there are tens of free economic calendars available on the web today, two of them are listed below)
(3) An online broker providing tight spreads and low execution delays ► Forex Brokers Comparison
(4) Certain skills regarding day-trading orders (limit orders, stop orders, trailing orders)
(5) Money-Management techniques that will limit your losses on bad days
News-Trading Tools on the Internet
◙ News-Trading and Economic Indicators
Giorgos Protonotarios, financial analyst