Economic Indicator

by Stephan Smith on February 15, 2011

As I cover various fundamental economic developments going on in any one country at any one time, I will definitely be referring to well known and not so well known ‘economic indicators‘. But one thing that comes to mind whenever I mention the term ‘economic indicators’ is that I’ve never explained to you what it is? I don’t like throwing terms and phrases out there without thoroughly explaining their meaning. I want you to be on the same page as me as I share my analysis, commentary and opinions regarding various economic developments, monetary policies, and currency price valuations.

So if you would like to get a firm understanding as to what economic indicators are, then please continue to read the information on this page. What I plan to do is explain in detail what ‘economic indicators’ are and why they are important to myself and other currency traders. I will also list a few economic indicators I like to use. Be sure to read this page because you should get a lot of good information from it.

What is an Economic Indicator?

An economic indicator is a fundamental statistic that is used to ascertain the performance of certain aspects of an economy. Some of my favorite popular economic indicators are employment data, inflation data, GDP data, housing data and retail sales data. Please note that there are many economic indicators available to the public. Some well known like the ones I’ve listed and some not so well known. Economic indicators are primarily provided by government entities, but sometimes they can be provided by private organizations.

Once enough fundamental statistical data (economic indicators) is obtained and assessed from the various sources, one can derive the overall performance of an economy as a whole and even make somewhat accurate predictions as to the future direction of an economy. That’s why the term ‘indicator’ is used. Economic indicators give an indication as to the current direction of an aspect of an economy. Economists, investors like currency traders and others attempt to make predictions regarding the future trend of an economy based on economic indicators. Which leads me to my next point.

Why are Economic Indicators Important to Currency Traders?

Currency traders can and do benefit greatly from following economic indicators. When a currency trader understands the current situation of an economy, a currency trader can obtain some insights regarding the future direction an economy is headed. By having that insight, one can take the necessary positions in the Foreign Exchange Market to be able to profit.

Being able to profit in the Currency Market is about probabilities. Since no one knows what will happen in the future for certain, the next best thing is trying to find out what is most probable to occur. Economic indicators grants you that insight. If an economy is experiencing poor employment, low inflation and low retail sales, one can conclude that it is highly probable that the economy’s central bank will take expansionary monetary policy action. With that information, a Forex trader can take the necessary positions in the FX market.

Oh, did you notice I said ‘highly probable’. I hope you did. It is highly probable that the central bank will take action. Nothing is known for certain ahead of time. This game is about probabilities; don’t forget that. In my example, the only reason I was able to conclude that the central bank would probably implement expansionary monetary polices was due to the economic indicators indicating that the economy was taking a turn for the worst.



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