What are economic Indicators? Definition - nextmarkets Glossary
What is trading? All financial markets go through cycles of highs and lows throughout the financial year. Traders can capitalise on these movements in market prices, speculating about where the market may move and entering and exiting trades at the right times to make a profit.
They can only do this, however, by correctly interpreting signals, or economic indicators, to predict where and when the market will move and to facilitate their trades on their nextmarkets accounts. Economic indicators are the pieces of vital information which allow traders to gain insight into financial markets and inform their trading decisions.
What are economic indicators?
Economic indicators are economic data points which analysts, traders and brokers use to measure a financial market, and make decisions about what to invest, where and when. There is no definitive list of economic indicators, it is a blanket term which can refer to any piece of market information which an investor chooses to use to measure the market and to help them choose their trade on the nextmarkets platform.
Economic indicators could be anything from the price per barrel of crude oil, to a country’s Gross Domestic Product, to a national election, and are crucial for understanding how to trade CFD. Indicators can be used individually, although it is much more common for traders to use a wide variety of economic indicators to interpret the markets and identify potential opportunities.
The three types of economic indicators on nextmarkets
The financial industry generally recognises three different types of economic indicators. They are differentiated by the time period which they refer to, rather than the type of data they represent. These categories are as follows:
- Leading: Indicators in this category are used to predict where the market will move in the future. They are generally considered to be the most useful to investors as they help traders understand what could happen to their money in their nextmarkets accounts.
- Lagging: Indicators in this category are used to confirm (or prove otherwise) the predictions of leading indicators. They are not measured in real time, so tend to be a few months behind the economy eg. the unemployment rate.
- Coincident: These indicators are used in real time, and reflect the current state of a market or economy eg. the current employment figures.
How do economic indicators work?
Traders all have different ways of using the economic indicators available to them on their nextmarkets accounts. The key is building them into a strategy which works for their market and their trading goals. They can be used alongside other technical analysis such as support and resistance lines and bollinger band strategies.
For example, if the rate of inflation is announced as having increased significantly, traders may have prepared a strategy for this in advance to enable them to react quickly and efficiently when the announcement is made. This doesn’t always mean that the market will behave exactly as they expected, but economic indicators can give traders advanced warning of a change on the horizon, although it is up to the trader how they act on this information.
Indicators of economic development
Economic development is different to economic growth. It extends further than the net worth of a country, and taking into account social progress as well as economic growth. Economic development cannot take place without economic growth, but growth does not guarantee an increase in development. There are various obstacles that a country might face in increasing its economic development.
Such obstacles include low levels of education, corrupt governments, lack of healthcare infrastructure, severe unemployment and natural disasters. Measurements which are often used as indicators of economic development include a country’s life expectancy, adult literacy rates, GDP per capita and the Human Development Index. Information on this is readily available on the nextmarkets platform.
Get to know your indicators before you start investing on nextmarkets:
- There is no definitive list of economic indicators, it is up to individual traders to decide which ones they choose to consider
- Economic indicators must be interpreted in order to be useful to traders
- Traders can set rules for themselves about how they react to certain indicators, and these rules are known as trading strategies
Human Development Index
The Human Development Index (HDI) is a statistic which is used in trading, often by Forex traders, to understand a holistic view of a country’s economy. For a refresher on Forex trading, read the nextmarkets What is Forex guide. The HDI is calculated using a number of metrics, including the GDP per capita, average life expectancy and education levels, to create one overall score. This acts as a ranking of a country’s level of development, and allows countries with different rates of all of the composite metrics to be easily compared. It is used as background context for economic indicators, as markets with higher levels of development will react differently to the same external factors.
Economic Indicators by Direction
As well as categorising economic indicators by the time periods they relate to, they can also be sorted into three types according to their direction in relation to the direction of the market generally.
- Procyclical indicators: These move with the general economy, increasing when the economy or market is growing and decreasing when the economy or market is shrinking.
- Countercyclical indicators: These move in the opposite direction to the economy or market. If the market size is increasing, these indicators will decrease or go down.
- Acyclical indicators: These have almost no correlation to the market cycle at all, and could rise or fall at any time regardless of what the market is doing.
Any one indicator could be categorised by time period as well as by direction, so you could have an indicator which is both procyclical and lagging to help with your nextmarket trades.
How are UK economic indicators different to other markets?
The calculations for the various rates, statistics and percentages which make up economic indicators are largely the same from market to market and country to country, but the numbers themselves will differ greatly between markets. Some global events may affect more than one market at the same time, but largely markets will be influenced by national events, reports and economic conditions.
There is, of course, an exception for Eurozone countries, where a shared currency means that economies are more likely to be impacted by events outside their own country. In some cases, indicators will be calculated slightly differently in the UK compared to other markets. For example, in the calculation of the consumer price index, a different basket of goods and services will be used in the UK than is used in other countries and can be viewed on the nextmarkets platform.
What are leading economic indicators?
Leading economic indicators are stocks, reports, statistics, indices or rates which can be interpreted to predict the way in which a market is heading in the future. Some of the most popular leading indicators include applications for unemployment insurance, average weekly hours worked in the manufacturing sector or stock inventory levels.
As they refer to things which have yet to really happen, leading indicators are often estimated or extrapolated figures which are not always accurate. Even the best Forex broker will have to take leading indicators with a degree of scepticism, but at the end of the day, that is why they are known as indicators and not measures or facts. Traders will need to make their own deductions before placing their trades on nextmarkets.
What are Lagging Economic Indicators?
Lagging economic indicators are stocks, reports, statistics, indices or rates which have been calculated using historical data from the markets. The process of calculating these figures means that there is a lag before the information is publicly available, hence the name lagging indicators.
The information is usually only released once a market or economy has already begun to trend in a particular direction. Traders can use previous patterns of lagging indicators in the past to make predictions about where the market may head if certain conditions are met again. The nextmarkets Forex demo account can help traders get used to market behaviour following lagging indicators.
The Best Economic Development Indicators according to nextmarkets
In CFD trading, (What is CFD), there are many different indicators of economic development. The Human Development Index (HDI) is the most common of these, but as it is a composite metric, it hides the details of movements in the individual rates which make up the overall HDI number.
There could be changes in infant mortality rates and life expectancy which cancel each other out in terms of the HDI, but could individually have an impact on the market. There are many different indicators of economic development which are all useful when assessing the state of a country’s economy. These include birth and death rates, infant mortality rate, life expectancy, GNP per capita, literacy rate and education levels. Major changes in any of these rates can be significant economic indicators for traders while trading through nextmarkets.
How nextmarkets traders can find economic indicators
There are plenty of places that traders can go to find information about economic indicators. The public have access to much the same reports that traders do, through the national media and forums such as the office for national statistics.
The best CFD broker will make this information easily available to their clients so that traders do not have to search for this information high and low. There are also tools such as the nextmarkets Forex calendar, where key reports and statistics are recorded, as well as information about when future reports are expected to be released. Here, traders can plan for future movements in the markets by knowing when to be prepared for major market changes.
Did you know?
There is much to be learned about economic indicators. Even experienced traders will learn new things all the time, and have to adapt strategies and indicators with shifts in the market. To start you off on your journey into the world of UK economic indicators with nextmarkets, did you know:
- Economic indicators is simply a term used to talk about different economic statistics collectively
- Traders do not calculate indicators themselves, they merely interpret what the pieces of information might mean for the behaviour of a given market
- Indicators can be compiled by governments, agencies, watchdog groups, think tanks and financial institutions
The difference between coincident and current economic indicators
Current indicators is another term used to refer to coincident indicators. There is no difference between these two types of economic indicators, but different traders have different ways of referring to them. Current economic indicators are those indicators which give traders and brokers information about markets in real time.
Rather than being calculated retrospectively to refer to the state of the market weeks, months or years ago, current indicators give investors a piece of information about the market as it is now. These can often be key pieces of information to help investors gauge the state of the market at the time of trading on their nextmarkets accounts, when other indicators may be a little less reliable if the information is already out of date.
What are the main economic indicators?
There are hundreds, if not thousands, of economic data points which could be considered as economic indicators. However, there are certain indicators which even in the nextmarkets Forex trading for beginners they must be mastered before a novice makes their first trade.
These main economic indicators include measures such as Real Gross Domestic Product, Money Supply, Consumer Price Index, Current Employment Statistics, Consumer Confidence Survey, house prices, oil prices, the rate of inflation and national interest rates. Before investing in any financial market, it is vital that traders understand the main economic indicators listed here, and how they may impact the direction of the market.
Coincident economic indicators according to nextmarkets
Coincident indicators, also known as current indicators, are metrics and measures which demonstrate the current state of the economy. These indicators are all measurements which can be seen in real time, so there are no delays caused by collecting data and calculating metrics.
Examples of such measurements include producer prices of goods and services, national interest rates, consumer price inflation, industrial output and the average weekly hours worked in the manufacturing sector. These are arguably the most important economic indicators for traders, as they are often the ones which will create signals for traders to act on in the present. However, they must be used in conjunction with leading and lagging indicators to create the most reliable signals for trading on the nextmarkets platform.
Why are economic indicators important to nextmarkets traders?
Economic indicators are vital financial tools for all traders on nextmarkets and beyond. In the stock market, these indicators are what traders use to decide when to invest in shares, when to sell their stocks and when to hold their assets steady in the market. Without any indicators to go on, speculating on the financial markets is simply blind gambling and the chances of traders making any real profit are very small. Indicators allow financial traders to interpret the market, to predict where it might be heading and to make informed decisions about whether to enter or exit trades.
Are economic indicators conclusive?
Indicators are called indicators for a reason; they only give an indication as to where the market might be headed. Indicators have to be interpreted correctly in order for them to be useful, and this interpretation requires the skill of someone with knowledge of the relevant market. Indicators can be thought of as signposts, which might give an idea of where the market could end up, but are not conclusive proof of whether it will go there. One indicator is fairly useless on its own – they must be used in conjunction with other indicators in order to have any real impact for investors on their nextmarkets trading journey.
Indicators are your golden key to trading on nextmarkets
You would have to be very very lucky indeed to see the cash mount up in your nextmarkets CFD Account without having a thorough understanding of economic indicators. Indicators like inflation and interest rates, economic growth and unemployment rates can all demonstrate the overall state of the economy and give traders vital context to the market.
Lagging indicators will help you understand why historical changes in the market took place, coincident indicators will give you a vital snapshot of the market in real time, and leading indicators can help you to see where the markets might be heading in the future. All three types are just as important as each other and should not be studied in isolation. To experience the best of these indicators, open a nextmarkets account today!