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Understand The Implications Of Forex Economic Indicators
When you look at the various economic indicators, you should know what you are looking for.
The complete details of the indicators are not required; you are more interested in knowing what the economic indicator is measuring, what the latest figures indicate and how they will impact the currency.
Different economic indicators point to various aspects of the economy.
The growth of the economy is measured in terms of GDP, the inflation in terms of CPI or PPI and strength of the economy in terms of employment or housing data.
Understand the Importance of the Data
Not all economic indicators play the same role in influencing the currency prices at all times. As the market conditions change some indicators become more important than others and this focus can change over time.
For example, if a country is struggling to grow its economy, the inflation indicators may play less of a role and indicators like the GDP and employment data will come into focus.
Expect the Unexpected
Very often, what affect the currency prices are not so much the data itself but how expected or unexpected the figures are.
If the market is expecting encouraging figures and the data released indicates otherwise, there will be a sharp fall in the prices. Similarly, if the market is expecting some bad reports but the data is found to be encouraging, there will be a sharp rally. It is therefore important to keep track of what most economists and trade pundits are predicting since any variation from these predictions often leads to tremendous volatility and trading opportunities.
However, before you jump into any trade based on the release of any particular indicator, you have to be careful and understand if this is a one-off phenomenon or whether other indicators also confirm the same.
Filter the Data
Trying to understand the economic indicators need not mean sifting through minute details of every economic report put out by the various organizations.
You have to very judiciously filter out the data that you feel will have an impact on the economy and hence the currency prices. This will help you with your trading decisions.
For example, keep an eye on what the main features of the employment report are. New jobs are a good indicator of how well the economy is doing but for trading decisions, you may want to look at what the non-farm payroll figures are. Similarly, while the PPI is a good indicator of the production strength, for trading decisions, you may need to exclude the most volatile factors from the PPI to have a more accurate picture.
The most volatile factors are of course, food and energy prices.