The Importance Of Key Economic Data
Have you ever been trading an instrument when the price suddenly spiked in one direction?
If you were lucky, the spike went in your favour and you were able to profit from it. If you weren’t so lucky, it’s possible that the price spiked back through your stop-loss and you were thrown out of your trade.
There are several reasons why spike might have happened. In many cases, spikes occur when key economic data are released.
You may be thinking ‘if only I knew exactly when announcements were about to happen, I could position my trades accordingly.’ Quite right – and you can.
Most economic announcements happen on a monthly schedule, which you can see on our Economic Calendar page
Top TIP: Economic data surprises
How much an instrument’s price will move on the announcement of the country’s economic data usually depends on the degree of the surprise. A data surprise refers to how much the ACTUAL data has beaten or missed the consensus ESTIMATE.
Therefore you can get:
- POSITIVE surprises (when announcements BEAT the consensus estimate)
- NEGATIVE surprises (when announcements MISS the consensus estimate)
The degree of movement will depend on:
- The importance of the data release
- The size/degree of the surprise
As a general rule in forex trading, economic announcements mainly affect the price of the local currency. There can also be an impact across other asset classes such as bond markets, equity markets, and sometimes commodities.
Not all economic data impacts financial markets to the same degree. The severity of impact depends upon the implications for the country’s economy, and also upon the magnitude of the surprise. When you strip it all down, data surprises impact price levels because they change future market expectations.
Important economic announcements from the major economies can also have a profound impact across different currencies and different markets, driving big price movements and market volatility.
As such, key economic indicators are something that the conscientious trader needs to be aware of.
The Indicators to look out for
We help our clients educate themselves about markets and build an understanding of the importance that specific data can have for a country’s economy. Economic data can impact a variety of traded instruments and asset classes.
Key economic indicators for the big markets can also impact your trading positions.
That’s because the release of a key economic indicator can completely change market sentiment about an instrument’s price, turning a bullish day into a bearish day or vice versa. Data can drive markets through key support and resistance levels that previously seemed to be rock solid.
Why? The reason is that key economic indicators have the power to change market perceptions and expectations.
All economic data plays a role in building the macro picture. However, there are key indicators that really need to be focused on:
A few tips for identifying trends in economic data:
Concentrate on the year-on-year data
Looking past month-on-month data can help remove a large number of random fluctuations and iron-out future revisions. It is also possible to better identify the trends in yearly data.
Volatility in monthly data means the market will tend to focus far more on the year-on-year trend. For example, if the data misses expectations on the monthly data, but the year-on-year data beats market expectations (possibly due to prior revisions), then this will be seen as a positive.
There are leading indicators and laggard indicators.
Leading (or forward-looking) indicators like consumer data and PMI surveys will often drive market volatility far more than laggard (or backwards-looking) indicators like unemployment or industrial production.
Headline versus adjusted (core) data.
You will usually find that headline and core data are announced at the same time (for example, with inflation or retail sales). The “headline” number may be the data talked about in the newspapers the next day. Still, often this data will be full of volatile or distorting elements. Experienced traders will tend to look more towards “core” data, which is a cleaner version and provides better guidance.
Preparing for major announcements
When the timing of an economic announcement draws near, traders have three options for their positions:
1) Stay market neutral
Go into the data announcement without a trading position. Once any data surprises are known, take a position with a clearer outlook.
PLEASE NOTE that this is by far the safest option.
2) Tighten stops.
Data will often drive a market to trend on a significant surprise. If a position is caught on the wrong side of a data surprise, tightening a stop can restrict losses.
3) Widen stop-loss.
This can give you the ability to ride out any volatility driven by the announcement. As long as the market doesn’t trend away from you, this strategy could provide flexibility to reassess the validity of your position after the data.
PLEASE NOTE that this is the riskiest option.
ALSO: The more risk-averse way to trade economic data would be to use option 1 or option 2. Employing option 3 as a strategy would be a high-risk strategy as it significantly changes the risk-per-trade of the position.
Example: The impact of Non-farm Payrolls on EUR/USD
A strong Non-farm Payrolls report is dollar positive, and this can have a decisive impact across major markets.
The example below shows the impact on EUR/USD from a strong report. In November 2019, the headline jobs number beat expectations with a big surprise. Wages remained solid, and unemployment ticked lower. A broadly strong report. The result was a trending dollar move.
The impact of Time Horizon
The degree to which a trader needs to be concerned by economic data will tend to depend upon the trading time horizon. A short-term/intraday trader will need to be very aware of key data releases. This is because data can significantly impact intraday price moves. At the same time, stop-losses will tend to be much tighter than those of a medium- to longer-term trader.
It is very rare for markets not to react to important data announcements. Subsequently, some price movement can at least be expected. You should always be aware of the announcements that can influence your trading position.
Ultimately when trading around economic data, be prepared for market volatility.