forex #19

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Economic Indicators 101 - How to Have Half Your
Trading Battle Plan Created For You.
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We touched upon this briefly in Lesson #6 - which was a
lesson mainly covering what fundamental analysis is and how
it differs from technical analysis - but, because economic
indicators by far provide the most information of all the
fundamental factors, we wanted to save this towards the end
so you can PRINT OUT half your *trading battle plan*


Here's what we mean:


Unlike the financial, political, and crisis factors,
economic indicators occur in a steady stream, at certain
times, and more often!


Economic indicators are snippets of economic data published
by various agencies of the government or private sector.
These statistics, which are made public on a regularly
scheduled basis, help market observers monitor the pulse of
a countries economy.


Therefore, they are religiously followed by almost everyone
in the FOREX markets. With so many people poised to
react to the same information, economic indicators in
general have tremendous potential to generate volume and to
move prices in the markets.


Our RESOURCE GUIDE to Economic Indicators will help you
conquer half the battle.


And, as we mentioned in Lesson #7 (Technical Analysis), the
other half of the plan is now forecasting the proper short
to long-term trend and entering your trades, and exiting
them accordingly.


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While on the surface it might seem that an advanced degree
in economics would come in handy to analyze and then trade
on the glut of information contained in these economic
indicators, a few simple guidelines are all that is
necessary to track, organize and make trading decisions
based on the data.


*** Know exactly when each economic indicator is due to be
released ***


Keep a calendar on your desk or trading station that
contains the date and time when each stat will be made
public. You can find a Fundamental Announcements calendar in
the Rapid Forex Resources Section.


=======================================================
NOTE: We have an entire course on how to profit from
economic indicators, news releases and fundamental
announcements. It's titled "Explosive Profits" and
you can learn more about this innovative trading method
here: http://rapidforex.com/explosive.shtml . As a
student and member of our Membership Resources Section,
you will also receive our Top picks for the week.
We will highlight several News Releases for the week for
you to concentrate on.
=======================================================


*** Keeping track of the calendar of economic indicators
will also help you make sense out of otherwise unanticipated
price action in the market ***


Consider this scenario: it's Monday morning and the USD has
been in a tailspin for three weeks. As such, it's safe to
assume that many traders are holding large short USD
positions. However, on Friday the employment data for the
U.S. is due to be released. It is very likely that with this
key piece of economic information soon to be made public,
the USD could experience a short-term rally leading up to
the data on Friday as traders pare down their short
positions. The point here is that economic indicators can
effect prices directly (following their release to the
public) or indirectly (as traders massage their positions in
anticipation of the data.)


*** Understand what particular aspect of the economy is
being revealed in the data ***


For example, you should know which indicators measure the
growth of the economy (GDP) vs. those that measure inflation
(PPI, CPI) or employment (non-farm payrolls, unemployment).
After you follow the data for a while, you'll become very
familiar with the nuances of each economic indicator and
what part of the economy they are measuring.


*** Not all economic indicators are created equal ***


Well, they might've been created with equal importance but
along the way, some have acquired much greater potential to
move the markets than others. Market participants will place
higher regard on one stat vs. another depending on the state
of the economy.


*** Know which indicators the markets are keying on ***


For example, if prices (inflation) are not a crucial issue
for a particular country, inflation data will probably not
be as keenly anticipated or reacted to by the markets. On
the other hand, if economic growth is a vexing problem,
changes in employment data or GDP will be eagerly
anticipated and could precipitate tremendous volatility
following their release.


*** The data itself is not as important as whether or not it
falls within market expectations ***


Besides knowing when all the data will hit the wires, it is
vitally important that you know what economists and other
market pundits are forecasting for each indicator. For
example, knowing the economic consequences of an unexpected
monthly rise of 0.3% in the producer price index (PPI) is
not nearly as vital to your short-term trading decisions as
it is to know that this month the market was looking for PPI
to fall by 0.1%. As mentioned, you should know that PPI
measures prices and that an unexpected rise could be a sign
of inflation. But analyzing the longer-term ramifications of
this unexpected monthly rise in prices can wait until after
you've taken advantage of the trading opportunities
presented by the data. Once again, market expectations for
all economic releases are published on various sources on
the Web and you should post these expectations on your
calendar along with the release date of the indicator.


*** Don't get caught up in the headlines ***


Part of getting a handle on what the market is forecasting
for various economic indicators is knowing the key aspects
of each indicator. While your macroeconomics professor might
have drilled the significance of the unemployment rate into
your head, even junior traders can tell you that the
headline figure is for amateurs and that the most closely
watched detail in the payroll data is the non-farm payrolls
figure. Other economic indicators are similar in that the
headline figure is not nearly as closely watched as the
finer points of the data. PPI for example, measures changes
in producer prices. But the stat most closely watched by the
markets is PPI, ex-food and energy. Traders know that the
food and energy component of the data is much too volatile
and subject to revisions on a month-to-month basis to
provide an accurate reading on the changes in producer
prices.


*** Speaking of revisions, don't be too quick to pull that
trigger should a particular economic indicator fall outside
of market expectations ***


Contained in each new economic indicator released to the
public are revisions to previously released data. For
example, if durable goods should rise by 0.5% in the current
month, while the market is anticipating them to fall, the
unexpected rise could be the result of a downward revision
to the prior month. Look at revisions to older data because
in this case, the previous month's durable goods figure
might've been originally reported as a rise of 0.5% but now,
along with the new figures, is being revised lower to say a
rise of only 0.1% therefore, the unexpected rise in the
current month is likely the result of a downward revision to
the previous month's data.


*** Don't forget that there are two sides to a trade in the
foreign exchange market ***


So, while you might have a great handle on the complete
package of economic indicators published in the United
States or Europe, most other countries also publish similar
economic data. The important thing to remember here is that
not all countries are as efficient as the G7 in releasing
this information. Once again, if you are going to trade the
currency of a particular country, you need to find out the
particulars about their economic indicators. As mentioned
above, not all of these indicators carry the same weight in
the markets and not all of them are as accurate as others.
Do your homework and you won't be caught off guard.


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General information regarding
major economic indicators
==============================


When focusing exclusively on the impact that economic
indicators have on price action in a particular market, the
foreign exchange markets are the most challenging, and
therefore, have greatest potential for profits of any
market. Obviously, factors other than economic indicators
move prices and as such make other markets more or less
potentially profitable. But since a currency is a proxy for
the country it represents, the economic health of that
country is priced into the currency. One very important way
to measure the health of an economy is through economic
indicators. The challenge comes in diligently keeping track
of the nuts and bolts of each country's particular economic
information package. Here are a few general comments about
economic indicators and some of the more closely watched
data.


Most economic indicators can be divided into leading and
lagging indicators.


Leading indicators are economic factors that change before
the economy starts to follow a particular pattern or trend.
Leading indicators are used to predict changes in the
economy. Lagging Indicators are economic factors that change
after the economy has already begun to follow a particular
pattern or trend.


MAJOR Indicators:


The Gross Domestic Product (GDP) - The sum of all goods and
services produced either by domestic or foreign companies.
GDP indicates the pace at which a country's economy is
growing (or shrinking) and is considered the broadest
indicator of economic output and growth.


Industrial Production - It is a chain-weighted measure of
the change in the production of the nation's factories,
mines and utilities as well as a measure of their industrial
capacity and of how many available resources among
factories, utilities and mines are being used (commonly
known as capacity utilization). The manufacturing sector
accounts for one-quarter of the economy. The capacity
utilization rate provides an estimate of how much factory
capacity is in use.


Purchasing Managers Index (PMI) - The National Association
of Purchasing Managers (NAPM), now called the Institute for
Supply Management, releases a monthly composite index of
national manufacturing conditions, constructed from data on
new orders, production, supplier delivery times, backlogs,
inventories, prices, employment, export orders, and import
orders. It is divided into manufacturing and non-
manufacturing sub-indices.


Producer Price Index (PPI) - The Producer Price Index (PPI)
is a measure of price changes in the manufacturing sector.
It measures average changes in selling prices received by
domestic producers in the manufacturing, mining,
agriculture, and electric utility industries for their
output. The PPIs most often used for economic analysis are
those for finished goods, intermediate goods, and crude
goods.


Consumer Price Index (CPI) - The Consumer Price Index (CPI)
is a measure of the average price level paid by urban
consumers (80% of population) for a fixed basket of goods
and services. It reports price changes in over 200
categories. The CPI also includes various user fees and
taxes directly associated with the prices of specific goods
and services.


Durable Goods - Durable Goods Orders measures new orders
placed with domestic manufacturers for immediate and future
delivery of factory hard goods. A durable good is defined as
a good that lasts an extended period of time (over three
years) during which its services are extended.


Employment Cost Index (ECI) - Payroll employment is a
measure of the number of jobs in more than 500 industries in
all states and 255 metropolitan areas. The employment
estimates are based on a survey of larger businesses and
counts the number of paid employees working part-time or
full-time in the nation's business and government
establishments.


Retail Sales - The retail sales report is a measure of the
total receipts of retail stores from samples representing
all sizes and kinds of business in retail trade throughout
the nation. It is the timeliest indicator of broad consumer
spending patterns and is adjusted for normal seasonal
variation, holidays, and trading-day differences. Retail
sales include durable and nondurable merchandise sold, and
services and excise taxes incidental to the sale of
merchandise. Excluded are sales taxes collected directly
from the customer.


Housing Starts - The Housing Starts report measures the
number of residential units on which construction is begun
each month. A start in construction is defined as the
beginning of excavation of the foundation for the building
and is comprised primarily of residential housing. Housing
is very interest rate sensitive and is one of the first
sectors to react to changes in interest rates. Significant
reaction of start/permits to changing interest rates signals
interest rates are nearing trough or peak. To analyze, focus
on the percentage change in levels from the previous month.
Report is released around the middle of the following month.