How to Use Data from Economic Indicators in Trading - dummies

How to Use Data from Economic Indicators in Trading

By Michael Griffis, Lita Epstein

Plenty of economic data is available, but not all of it is relevant to the types of stocks you want to trade. Organizing your data collection and tracking the trends can make choosing economic signs and analyzing which part of the business cycle is driving the markets easier for you. Here are a few steps that can make this task much easier:

  1. Maintain a calendar of the release dates for the key economic indicators you decide to follow.

    The markets may move in anticipation of this data, so if you know that a key economic indicator is about to be released, be sure to watch stock price trends for the possible impact the anticipated release may be having on the market.

  2. Know the parts of the economy that are most impacted by the economic indicators you’re following.

    For example, the GDP strongly suggests the path of economic growth, but PPI and CPI are strong measures of inflation.

  3. Know which economic indicators are most important to the market.

    For example, in times of inflation, economic indicators that reveal key data regarding inflation are the biggest market movers. If the markets are worried about growth, the growth components of GDP and other indicators will have the greatest potential for moving the markets.

  4. Know what the market is expecting to see in the numbers.

    The actual number is not as critical as whether that number was expected by the markets. Surprises are what move the markets.

  5. Know what parts of the economic indicator are important.

    Newspapers may write headlines for shock value, but the parts of the index they cover may not be critical to your decision making. For example, traders know that food and energy components of the CPI are volatile, so the more important number to watch is the core CPI, which doesn’t include food and energy. The news media may focus only on the more volatile number.

  6. Don’t overreact to a newly announced economic indicator that didn’t meet market expectations.

    Indicators frequently are revised after they’re initially issued. The difference may merely be related to a revision and not an indication of a shift in the business cycle. However, be sure to check information about revisions to the previous month and how those revisions have impacted the current month’s trend.

  7. Monitor the trends.

    On your calendar, keep track of key components of each economic indicator that you watch. Follow the trends of the most important data components to get a good idea of where the business cycle is headed.

Keeping a tight watch on economic indicators is the best way for you to determine at what point the economy is in a new business cycle. Waiting for official pronouncements is much too late. By the time they’re released, that phase of the cycle may be over and a new cycle may be driving the markets.