Tradeonomics - Four Steps to Trading Economic Indicators

A Step by Step Guide to Using Fundamental Analysis in Your Trading Strategy

Do you know the #1 reason why many retail traders underperform compared to their market counterparts namely - interbank dealers, hedge funds, financial institutions?

Studies suggests that despite retail traders having strong requirements to be well informed they are not. They do not anticipate returns on trades, lack trading acumen and are emotional when trading.

What stops traders from being better informed, improving their trading acumen or reducing emotional trades such as hope and wishful thinking?

The answer is - it's not easy to make the connections between the economy, central bank actions and financial instrument prices.

However there are just 4 steps that simplify the process of making the connections between these three factors easier. Continue reading to find out the 4 steps…

As a trader in the interbank market I relied purely on technical analysis for the first  few years. Drawing trendlines, using technical indicators such as moving averages, MACD, RSI etc etc to predict returns in the FX markets. 

Though I utilised technical analysis I never really understood the "fundamentals" behind the primary trend or reversal of trends; what these linkages between economic indicators, financial markets and central bank policy decisions were...

To quote the guru of technical analysis - 

"Market Analysis can be approached from either direction (Technicals or Fundamentals). While I believe that technical factors do lead the known fundamentals, I also believe that any important market move must be caused by underlying fundamental factors. Therefore, it simply makes sense for a technician to have some awareness of the fundamental condition of a market." - John  J. Murphy, Technical Analysis of the Futures Market 

The 4 steps are - 

Step 1 - Identify the price determinants of financial instruments - stocks, bonds and FX

Step 2 - Understand how each economic indicator contributes to either economic growth or inflation (we use an economic map to demonstrate these connections); economic indicator release dates; who compiles them; leading, lagging or coincident indicator; 

Step 3 - Study the impact of each economic indicator on financial instrument prices - classify the impact as high, medium, low. We will also visit websites that make it easy for traders to track these indicators

Step 4 - Make the connection between economic indicators, central bank’s monetary policy impact and financial instrument prices to trade financial markets. With the help of a spreadsheet we will record data that will improve our chances to predict asset price movements before and after an economic data release. 

The Use of an Economic Map 

We make these connections between economic entities, factors, markets and central bank policies through the use of an economic map. The economic map helps us to understand how each small sub-component aggregates to the larger components, which in turn aggregate to the Gross Domestic Product thus giving us a wider perspective of how entities interrelate with one another.

Some of the economic indicators we will study are: 

• The Quarterly GDP Report
• Car Sales Report
• Retail Sales Report
• Personal Income and Outlays Report
• Housing Starts
• Durable Goods Orders Report
• Factory Orders and Manufacturing Inventories
• Construction Spending
• Trade Balance Report
• Purchasing Manager's Index 
• Employment
• Industrial Production
• Leading Economic Indicators

 Skills you should be able achieve by the end of this course

By the end of this course, you will have all the tools necessary to start trading by making the connections between these economic indicators, financial markets and the central bank's monetary policy. This is the knowledge that investment bankers acquire during their trading experience and it is this technical skill that we will achieve by the end of this course.

You could also get the Kindle book or iBook. Please search for "Tradeonomics - The Four Steps to Mastering U.S. Economic Indicators" on the Amazon/iBooks store. If you do not have a Kindle reader you can read Kindle books on your computer, phone, tablet by downloading the Kindle app.