What Are Fundamental Economic Indicators?
Economic indicators are typically important news announcements that involve sensitive economic data.
How Do Economic Indicators Affect Trading Decisions?
Consider this example:
It’s Monday morning and the U.S. Dollar had been spiraling down in the past two weeks. At this point, it’s pretty safe to assume that there are many traders holding on to large USD short positions.
However, there is an important economic announcement scheduled to be broadcasted on Friday. Industry experts are estimating this coming announcement to reflect a positive outlook for the U.S. economy, and most traders will thus be expecting a short-term USD rally this Friday. As the week progresses, the traders will gradually be exiting their short positions to lock in their profits - they wouldn’t want the upcoming positive news announcement to eat away their gains!
In this example, you can see that economic indicators affect market prices on two levels:
1) Directly: When positive USD-related news is announced, the dollar rallies
2) Indirectly: Traders who are expecting the news to go against their open positions will slowly exit their trades, causing the USD to rise even before the announcement
How Should You Trade With Economic Indictors?
This is actually a trick question. Generally, one should avoid trading during the times of fundamental news announcements. This is because the market volatility during these periods is extraordinarily large, and the combination of this plus a high chance of slippage will almost guarantee that you lose money.
News trading is advised only for the advanced traders, and beginner traders should stay well clear of this territory.
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Harold Hsu is the owner of http://ForexSystemProfits.com where he provides premium Forex trading information and resources.
