The role of economic indicators in trading
Economic indicators are key data releases that help traders in the assessment of the economic status and growth of a certain country. This data is used to predict a future increase or decrease in the value of an asset. Therefore investors need to understand how economic factors impact prices of stocks and currencies. They can determine the right time to invest in a specific asset after careful analysis of economic indicators.
How do economic indicators influence market movements?
Releases of economic indicators influence the general market sentiment. These indicators can be interpreted directly as either positive or negative, so they will be reflected in the markets. The announcements create volatility and wild price swings in the short term, but may have a long-lasting impact as well, showing the general trend of the market. These situations provide good opportunities for investors as they can effectively trade using either short or long term binary options.
The most influential economic indicators include:
- Consumer Price Index (CPI) is the weighted average of prices of a basket of consumer goods and services. Changes in CPI show price changes associated with the cost of living, so it reflects inflation. Modest inflation can indicate a growing economy, but if prices rise quickly, manufacturers may experience profit declines, so stock prices may decrease. Deflation can be a negative sign as it indicates a low consumer demand. Manufacturers are forced to drop prices to sell their products, so stock prices may decrease for this reason, too.
- Gross Domestic Product (GDP) is the value of all the finished goods and services produced in a country in a specific period. It shows a nation’s overall economic activity. A low GDP lowers the value of the domestic currency and may result in a selloff. On the other hand, a high GDP strengthens the underlying currency versus other currencies, so investors will buy it.
- Interest rates: When a central bank raises or lowers the interest rates, the currency markets react immediately. Raising interest rates strengthen a particular currency, while decreasing rates make it weaker.
- Non-farm payroll (NFP) data is used in the US. It is regarded as one of the most volatile economic indicators. The employment situation in the US is a good indicator of the health of the economy, so changes in its impact each financial market. This data is released on the first Friday of each month and trading binary options before, during or after the release can be rewarding.
Using economic indicators in binary options trading
The above mentioned indicators need to be examined properly during binary options trading in order to understand their effects on market prices. Traders can use these when they consider taking a position and look for a general rise or fall in the markets following or in anticipation of the release of the data.
Economic indicators are very often anticipated by analysts in advance. Trades based on the anticipations can be rewarding. However, trading when the figures deviate from the estimates of economists can be even more profitable. If the data does not meet the forecasted expectations, asset prices change rapidly. Binary options traders can use these scenarios to trade in the short term and during the subsequent correction in the markets.