Market Indicators in Online Trading
Expand your trading toolbox: learn about GDP, CPI, Bollinger Bands, MACD, RSI and Stochastics.
Forex traders make use of economic indicators to assist them in their daily trading regimens. Simply put, an economic indicator is economic data that is used by investors for interpreting present and future investment opportunities.
Economic indicators are also used to gauge overall market sentiment. On a macro scale they include factors like unemployment data, manufacturing and industrial production figures, GDP, and CPI.
These market indicators are ideally suited to assisting traders in their trading decisions. Without indicators, it would be more challenging to identify market trends and directed towards trading opportunities as they occur.
Why Are Market Indicators So Important?
Everyone wants to be able to understand how current market conditions will impact their profitability in the short-term, medium-term and long-term. Economic indicators are a good place to start.
At their core, they are an agglomeration of statistics provided by numerous government agencies. Investors, Forex traders and economists try to interpret this data, seeking signs of economic slowdown or economic recovery. Everyday individuals may be averse to poring over mounds of economic data, but the inherent benefits far outweigh the inconveniences.
The most important economic data relates to how economies are behaving over time, as they account for the majority of all economic activity. As such, an economic indicator like Gross Domestic Product (GDP) is significant.
Another strong indicator is the Retail Sales Report which measures the total value of retail sales for the month. The Consumer Price Index (CPI) measures consumer prices with a fixed basket of goods.
This is the most important inflation determinant in an economy. Other indicators of note include New Home Sales and Unemployment Data. These point to the number of new homes being sold and the number of people actively participating in the job market.
Why Should You Use Market Indicators?
As a trader, it is difficult to see the big picture without using market indicators. These valuable resources are used to determine what types of investment opportunities are worth your while and which ones are best avoided.
Forex traders use indicators on a daily basis. It is important to know what causes currencies to fluctuate from one day to the next. Fortunately economic indicators can certainly help us to understand possible trends, highs and lows.
Consider for example the quantitative easing policy implemented by the European Central Bank. In an attempt to try to stave off deflation and bolster the European currency, the ECB’s widespread program of asset repurchases aims to inject liquidity into the Euro zone. By flooding the market with euros, the EURUSD exchange rate weakens.
Some economic indicators are subtle while others are obvious. When the US increases interest rates, it will attract foreign capital to US banks. This has the effect of reducing the US money supply and making the US dollar more valuable in relation to other major currencies.
Of course the economic ramifications of implementing monetary or fiscal policy measures are uncertain at best, but the theory holds true. Countries that are optimistic about their economic situation tend to generate positive sentiment vis-a-vis their currency in international markets.
Forex traders will react to bullish sentiment about a country via its currency. That is why the GDP is such an important economic indicator for Forex traders. If US economic growth exceeds expectations year over year, the dollar will benefit. All of the aforementioned factors typically follow trends; so if you can use algorithms, mapping, charting and trading aids, you can benefit in the Forex trading market.
Technical and Fundamental Analysis
Following from our discussion of market indicators, Forex traders and investors use a combination of Technical Analysis and Fundamental Analysis for forecasting and researching future growth patterns of trade-able assets.
Technical analysis studies statistics that have been generated by market activity. These include volume and price factors, but do not take into account a financial instrument’s intrinsic value. Various charts, graphs and trend mapping techniques are used to forecast an instrument’s future performance.
Fundamental Analysis measures the intrinsic value of financial products. These types of analysis focus on the big picture – everything from politics to the overall economy. Fundamental analysis incorporates all economic data while technical analysts typically are more interested in the change in price action and behavior over time.
What Tools Allow You To Spot Trends in the Market?
Many unique strategies have emerged over the years to help traders spot trends in the market. No strategy is foolproof, however. Bollinger Bands have come to be known as one of the most reliable and trusted of these strategies.
They are excellent economic indicators for highlighting short-term security prices. Traders tend to purchase when the asset price moves below the lower Bollinger Band, thereby allowing them to capitalize on oversold conditions.
Bollinger Bands have a characteristic Center Line (exponential moving average) in addition to two bands – one above the center line and one below the center line. In the stock market, when prices consistently touch the upper band, the market for that asset tends to indicate overbought conditions.
By contrast when prices tend to touch the lower band, the asset is perceived to be oversold. Other types of indicators include volatility algorithms, Bill William’s tools and Elliott waves.
Examples of Market Indicators for Forex Traders
Moving Average Convergence and Divergence (MACD)
In markets that tend to show trending characteristics, the MACD trading indicator is a valuable resource. Once the market environment has been identified as trending or ranging, there are several aspects that you will want to look at to generate signals from the MACD indicator.
First of all, look for the zero line and then spot the lines surrounding it. If there is a downward bias or an upward bias of the currency pair, you have an indicator. Also, look for crossovers or cross under of the moving average convergence and divergence line vis-a-vis the signal line for buy and sell trading decisions.
Relative Strength Index (RSI)
This oscillator is incredibly simple to use and it is really helpful as a Forex trading tool. With the Relative Strength Index oscillator, you can easily see when currencies are oversold or overbought.
It also tends to show you when a reversal is likely to occur. It is suited to ranging and trending markets to identify the best entry and exit prices. When there is no clear indication in the currency markets, the buy and sell signals generated by the RSI oscillator can be used.
This signal is valued between 0 – 100, with 100 being overbought and 0 defined as oversold.
Trade Currencies with Stochastics
Another oscillator – much like the Relative Strength Index – is Stochastics. This is used to identify overbought and oversold assets, which tends to reveal trends for price reversals. Stochastic indicators feature %K and %D lines for entry into the market.
Once the %K line crosses over the %D line at a certain level, you have identified a solid buy signal that follows the trend. Stochastic indicators are otherwise known as technical momentum indicators.
They are based on the theory that markets trending upwards feature prices that close near their highs, and markets trending downwards feature prices that close near their lows.