Foreign Exchange Trading - How To Use Economic Indicators to Predict Price Movements

When you start foreign exchange trading, one of the main things you have to learn, obviously, is how to predict price movements of currencies.

There are two types of analysis that can help you with this. One is Technical Analysis, which is concerned with exact charting of markets and price movements. The other is Fundamental Analysis.

Fundamental analysis is much less precise, but goes much more deeply into the causes of currency movements. It involves a whole range of factors including political situations, government policies, company takeovers, even natural events such as earthquakes or floods.

Of all the factors studied in fundamental analysis, few are more exact or provide better information for foreign exchange trading than economic indicators. These are sets of economic statistics published on a regular basis by government or private sector agencies. When taken together they can help you judge fairly accurately how a country's economy is doing.

Obviously there are a huge number of economic indicators used in any given country. They are divided into leading indicators and lagging indicators. Leading indicators take place before major changes in the economy become apparent, so can be used to signal that these changes are taking place. Lagging indicators signal that the changes already have occurred.

There are some leading economic indicators in the USA that are particularly important for foreign exchange trading. These include:

• GDP - Gross Domestic Product - represents the monetary value of all goods and services produced by the economy over a stated period. In the USA it is published quarterly. It includes the pace at which the country's economy is growing or not growing.
• CCI - Consumer Confidence Index. This is published monthly in USA and is seen as a big market mover - it is looked at closely by the Federal Reserve when determining interest rates.
• CPI - Consumer Price Index - published monthly in USA. Again this is seen as a major market mover and an extremely important indicator of economic health.
• NFP - non-farm payrolls. This is published monthly in the USA and records changes in the numbers of employees apart from farm, government and private household workers. It represents about 80% of US producers and is one of the biggest market movers.
• PMI - Purchasing Managers Index - a monthly composite index of manufacturing conditions in the USA. It is seen as important, especially the section that deals with the growth in new orders.

There are many more economic indicators, but these are some of the ones that carry the most weight. But how can you be expected to know all of these?

The most important things you need to do for the purposes of foreign exchange trading are:

• Know when each leading economic indicator is due to be released in the country whose currency you are trading.
• Understand which aspect of the economy is focused on in the data - e.g. inflation, economic growth, confidence, etc.
• Remember that the crucial issue is not the actual data, but the extent to which it falls within the expectations of the market. For example, the fact that there is a rise of 0.3% in the CPI would not be as important as the fact that the market had been expecting a fall of 0.1%.

This can provide you with vital clues for foreign exchange trading. The sooner you can make use of them after they appear, the more profitable your trading will be.

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