In this Wiki we will take a look at some Economic Indicator Pre-Trade Considerations you should have before trading any type of news or data. It is essential to have a well thought out plan of action prior to trading around economic indicators and data. This is what we will explore in this Wiki.
This Wiki is part of our larger Economic data releases. Be sure to check that out HERE.
Economic Indicator Pre-Trade Considerations
When incorporating economic indicators into your trading routine there are 4 major things that you must consider:
- The key number from the economic indicator announcement itself. This is frequently referred to as the headline number.
- Analysis of the indicator or an understanding what the indicator means.
- The overall consensus forecast by professional analysts before the announcement.
- The live-streaming news feed that accompanies the release. If you are just starting out there are plenty of free ones but some of these will be slightly delayed news feeds.
When it’s time for the economic release you will hear the indicator announced via the news feed by an audio squawk first which will then be followed by a text headline with some extra analysis provided by a professional analyst. There are a couple of really good premium paid audio squawk services that can really add an extra layer of profitability to your trading.
One of the most important factors of any economic indicator is the expectation or the consensus for the actual figure. This is what expert analysts and economists think the indicator will show for the given period we are looking at. For example, will the figure come out better than the previous month or worse, and if so, how much better or worse? Traders can then use this number to base their expectations.
We want to know what these expert analysts and economists think the number is going to be because it's literally their job to go through all the literature, analyze the bureau of statistics and government agencies, and spend their lives tracking and following this data. That's why these analysts exist, to feed us quality and well-thought-out expectations so that we can get a good idea of what is likely to happen with the data.
These consensus numbers are generally gathered by the main news companies such as Reuters, Bloomberg, MNI, etc. These are the companies that actually employ some of these analysts and economists. The consensuses are designed to get an average view across a wide range of different economic experts. The idea behind this is so that the data is more balanced and hopefully more accurate.
Along with these numbers the analysts also provide consensus for a high and a low figure. These high and low figures give traders a range in which to set their expectations. Traders can then use this information to potentially position themselves ahead of the event.
Think about this for a minute, professional traders do not generally trade the news as it’s released but rather they get in based on what they think might happen with the release in the days leading up to the actual release. They are attempting to price in the expectations for the upcoming news. They do this by using expert analyst expectations. This is what we call "trading into a risk event".
Another factor to keep in mind is that the markets will very often pay attention to the numbers behind the headline number. This explains times when you might get a really good headline figure, the currency pair rallies, but then the price seems to go the wrong way based on the positive headline. This can be frustrating but there can sometimes be negative things inside the figure which mean that despite the seemingly positive headline things are not actually as good as it seems.
This concept can apply to almost any type of figure and to illustrate it we will use the example of employment data.
Let’s imagine that the analyst expectation for the headline figure was 200,000 jobs created. The employment numbers beat the market expectations by a wide margin by coming out 300,000 jobs created instead of 200,000. This shows that more people have jobs than economists expected. You might think this is a very positive thing and the currency should rally which it probably initially will. However, if you look deeper into the numbers and you find that it’s made up of 400,000 part-time created and a loss of 100,000 full-time jobs while at the same time average wages have dropped dramatically then this is actually bad news because the overall standard of living for the people of the country will fall. Having more employed people is positive but having 1 person gain a new full-time position is worth at least 5 new part-time positions in economic value so the markets will obviously want to see the majority of jobs created be full-time jobs. So if we lost 100,000 full-time jobs then this is not going to be made up by the gain in part-time jobs. This is a negative release that looks positive.
This makes the headline alone not enough to tell us if the news was good or bad for the currency or the economy as a whole. This is a classic situation where we get a good headline number but the finer details show that the price will go in the opposite direction. As a trader, you need to be aware of this so that you can quickly digest all of the analysis before deciding how you will trade a particular event. But don’t worry; the news feeds will alert you to the figures behind the headline almost immediately after the initial release.
Tier one data points are, for obvious reasons, more important than tier two data points. This means that the market will generally react far more to tier one data. However, in certain circumstances, this may not always be the case.
For example, if the entire market is really concerned about oil prices and the impact that falling oil prices will have on inflation or a particular economy then this suddenly makes oil inventories much more important at that moment. This can be true even though oil inventories are typically considered to be a tier two data point. If the oil inventories show an oversupply of oil then this means potential further declines in price possibly leading to lower inflation and possibly the central bank cutting its interest rate. This sometimes happens for countries that are heavily dependent on exporting oil such as Canada. However, if the price of oil is stable then the Canadian currency will likely ignore oil as a leading pricing indicator for the Canadian currency.
As you can see, a lot of analysis is formed from the starting point of what the market is focused on most of the time. This is crucial to have in mind if you are to become successful as a trader over the long run.