In Times Of Uncertainties, Wisdom Must Be Applied To The Acquired Trading knowledge.By Kenneth@Xtrade - on August 9, 2019
In times of Uncertainties, Wisdom must be applied to the acquired knowledge.
Trading on Economic Reports or Data releases is one of the most common strategies which many market participants embrace in times like this when the markets are see-sawing.
This post is a compilation from one of our webinar materials which with the intent of sharing with you how almost anyone could use these economic indicators for leverage on the trading fields. Especially towards the weekend with profit-taking insight, in expectation of the Japans & UK’s GDP Gross Domestic Product report and various CPI Consumer Price Index, PPI Producer Price Index from Norway, China, to name a few.
Oil speculators will also be turning their attention to the Baker Hughes report to learn of any further tweaks, even though global future demand is downplayed or simply looks grim. Whether this would be sustainable for the long term remains to be seen.
Today Global stocks seem to be trading sideways. The Safe-havens continue to attract follows. The JPY is likely to extend more gains to the USD as I hope the explanation to follow will reveal.
How to trade with Economic indicators
Let’s get some Background.
- What Are Some Economic Indicators?
Economic Indicators are usually, DATA sets that give a reading/pulse-check on the different segments of the economy. Economic Indicators are published regularly by official governmental departments, (mostly The Bureau of Statistics, which collects and compiles the data), and by Private Financial Institutions/Companies that provide this service, free or at a cost. (i.e. Markit, S&P as well as various banks commissioned to do so).
Economic Indicator Data Types
Why are Economic Indicators important for Investors & Traders.
Economic Indicators can be categorized as follows:
- Supply Side Indicators – These indicators give a pulse check on the state of the supply chain (i.e. the supply side of the equation). These indicators include the PMI (Purchasing Managers Index), PPI (Producers Price Index), Industrial Production, and Durable Goods Orders.
- Demand Side Indicators – These indicators give a pulse check on the household consumption side (i.e. The Demand side of the equation). These indicators include CPI (Consumer Price Index), Retail Sales, Housing Stats, Home Sales, and Consumer Sentiment.
- General Economy Indicators – These indicators give an overall reading of the economy. These indicators usually combine both the supply side and the demand side to reflect on the entire economy. These indicators include GDP (Gross Domestic Product), Trade Balance, and Labor Market reports i.e. (Non-Farm Payroll: Jobs reports). Indicators, in general, are very helpful as they could be used, to alert in case of looming danger and be informative to the beholder for possible actions or omissions. Just like the Traffic light/Traffic Robot.
- Since Financial markets follow the expectations or hypothesis, traders & investors will be prudent in re-assessing their positions, given any new information/data that deviate from their expectations. If the data exceeds their expectations, they may be caught too “bearish”, and if the data misses their expectations, they may be caught too “bullish”.
- Different data sets have different impacts on the market. Some data releases could have a more profound impact on the market (for example labor market data, GDP and CPI), while other data releases will have a limited impact on the market.
Economic Data Paradigm
- 1st Tier Data Type:
- PMI (Purchasing Managers Index),
- PPI (Producers Price Index),
- Industrial Production, &
- Durable Goods Order
- 2nd Tier Data Type:
- CPI (Consumer Price Index),
- Retail Sales, Housing Stats/Home Sales &
- Consumer Sentiment.
- 3rd Tier Data Type:
- GDP (Gross Domestic Product), most of the time under 1st Tier.
- Trade Balance,
- Labour Market reports i.e. (Non-Farm Payroll, Jobs reports)
Examples of the market’s reaction to an Economic Surprise. Exhibit I
How to trade on Economic Data release?
- Asses the importance of the data, and the degree of volatility the report could generate.
- If this is an important economic data (1st tier data), do your homework and establish your own view on that economic data (is the market over/underestimating the outcome?)
- Expect a knee-jerk reaction should the data deviate significantly from market estimation (either exceeding or missing).
- Trade relatively short term trade, so you could capitalize on the initial reaction of the market to the release.
The End Game
As one master, how to take their cue from the various economic indicators it becomes clearer how to limit exposures to unforeseen risks, leading to an increased percentage of positive ROI.
Try this out practice on paper if you have to then those with funded Demo or practice accounts MUST in my view have to make good use of those funds to increase their trading knowledge.
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