Economic indicators are pieces of economic data that are used by investors to judge the overall health of the economy and make decisions on current and future trading opportunities. Any piece of data can be considered an economic indicator for a trader, but the most widely used pieces of data include: Consumer Price Index (CPI), Gross Domestic Product (GDP) and unemployment figures.
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Fundamental analysis is a wide analytical discipline that is used by investors to analyse and determine the intrinsic value of a financial instrument, such as stocks or currencies. As a tool of fundamental analysis, understanding economic indicators can make a real difference to your trading performance.
Economic Indicators Definition
Economic indicators are macroeconomic numbers that provide investors with a long-term picture of the overall direction in which an economy is going, and help to determine in which currency or economic sector to invest.
Decision makers, such as central bankers and politicians, rely on economic indicators to adjust their policies and ensure that the economy is on the right track.
Types of Economic Indicators
In general, economic indicators can be grouped into lagging, coincident and leading economic indicators.
Lagging indicators, such as inflation or interest rates, depend on the previous economic performance and are therefore lagging the current economic conditions.
Coincident indicators, which include the GDP and labor statistics, are changing simultaneously with the change in economic activity.
And finally, indicators that can be used to predict future economic performance are called leading indicators and include retail sales, building permits and net business formations, to name a few.
At this point, you might think that leading indicators are the holy grail of trading, but let’s see what are the leading economic indicators are supposed to predict. While specific macroeconomic numbers tend to have a predictive power of future economic activity, they’re closely watched by market participants around the world and are quickly discounted by the markets.
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