Using Macroeconomic Indicators to Trade Binaries

Trading binary options requires various analytical perspectives that pertain to market sentiment and price movement. This need accounts for the number of factors that are considered before making a decision. Analyses are worthless if they:

  • use illegitimate data,
  • reflect only a small percentage of the population,
  • are irregularly performed,
  • are inconsistently reported, and
  • are anomalous.

These forms of analyses can be easily avoided by following pertinent global news releases from reputable entities. Because binary options are considered as derivatives of the market, the binary options trader should therefore look into macroeconomic indicators if he wants to continue making successful trades.

Macroeconomic indicators are used by binary options traders to analyze market news and sentiment and to predict the future value of an asset. Knowing the nature of the market, as far as using the news to trade binary options is concerned, is useful because the quantitative data from macro-indicator analysis can provide a general measure to analyze world market trends. Different commissions, government entities, private financial think-tanks, and major banks create tools that are used for the analysis of market trends, and every binary options trader should know how to employ the data to yield meaningful information for their trades.

When considering the global landscape, macroeconomic indicators are processed for each country of the first world, which collectively are regarded as the major players in world economics. The economies of other countries partly depend on the performance, policy, and politics in these countries. For example, until the recent past, little attention has been paid to the interests of third world countries, but as more countries have continued to become more developed, the interests of the world have slowly started to shift towards a collaborative effort. When it comes to the economic market, countries are now more open to each other.

The US dollar, for instance, has expanded its market to be the standard currency on which international trade is based. After the Chinese economic reform that started in December 1978, China has also risen to become a major player in the world market, which has become more evident in the new millennium. Nearby countries now have to compete with their once-sleeping neighbor. In Europe, regionalization has caused the EU to strengthen, and in some cases weaken, the economies of member-states. The establishment of the Euro and the recent recession are just some of the challenges that the international organization faces.

These instances are just some of the events that shaped the world market to what it is today. Knowing history helps traders in their decisions, and being updated with periodic announcements from key players, countries, and companies allows the acquisition of information that provides better speculation about the factors that affect price change in the market. When these players give out a press release concerning key economic and political events that have a significant impact on world economics, the binary options trader should always be an earshot away. The information obtained could mean the difference between successful and lousy trades.

What Are Macroeconomic Indicators?

To non-traders, economic news releases are just everyday news items that may directly or indirectly affect their lives. However, to the binary options trader, they contain macroeconomic indicators that provide information on the general situation of a particular area of the economy (e.g., labor, industry, trade, policy, and other areas) of a country, thus implying the sentiment of a market. Macroeconomic indicators are economic statistics released periodically by government agencies and private organizations, providing insights into the economic performance of a particular country or region, and therefore providing significant impact on the trading market. Macroeconomic indicators guide traders with information.

Some Macroeconomic Indicators

The most influential macroeconomic indicators include data of the Consumer Price Index (CPI), figures of the Gross Domestic Product (GDP), announcements of interest rates, policies on employment, prices and costs of goods and services, foreign trade, domestic policy, and many others. These indicators not only create volatility across trading markets from the moment of their release, but they also have a lasting impact in the underlying the general trend of the market. Using an economic calendar for the dates of critical fundamental announcements and events can be helpful. When properly used, the following indicators can be invaluable to any trader.

Gross Domestic Product (GDP)

GDP is the total market value of all goods and services produced by a country for a particular year. It is the broadest measure of the economy of a country, and it represents the production capabilities of a country in different contexts. In the US, for example, GDP includes production by foreign companies working in the country’s territory, but it excludes production by domestic companies abroad. Because GDP is in itself generally considered as a lagging factor, most traders focus on both the preliminary and advanced reports that are issued in the months before the final GDP figure is released.

Consumer Price Index (CPI)

CPI is the most widely used indicator for inflation, which is directly tied to mediating the purchasing power of a currency and affecting its standing in international markets. It does this by gauging price changes in the daily consumption of consumer goods and services by households. Under normal conditions, the economy can generate an increase in CPI, which can lead to an increase in interest rates. Consequently, a currency becomes more attractive. The calculation of CPI includes products ranging from basic necessities and energy to expensive consumer goods. Prices are measured by taking a sample of prices from different stores.

Producer Price Index (PPI)

PPI can also measure inflation but by measuring the price of goods at the wholesale level. This indicator shows the level of income of producers for their goods by calculating the average changes in the prices they receive for their output. However, the importance of PPI is being undermined by the steady decline in manufactured goods as a share of spending, according to The Economist (Volume 387). In the US, PPI has been one of the oldest continuous systems of statistical data published by the Bureau of Labor Statistics and the oldest economic time series compiled by the Federal Government.

Interest Rates

Interest rates play a very important role in moving the prices of currencies in the market. As central banks set interest rates, they therefore most influentially dictate the flows of investment. Differences in interest rates affect the relative worth of currencies in relation to one another because currencies are the representations of the economy of a country. A change in interest rates by central banks can cause markets to experience movement and volatility. In terms of binary options trading, accurate speculation of the actions of a central bank can improve the chances of the binary options trader for successful trades.

An example of a country-specific macroeconomic indicator of the above-mentioned type is the 3-month Libor Range of Switzerland. The London Interbank Offered Rate (LIBOR) is the interest rate at which major banks distribute loans in the London interbank money market. The 3-month Swiss Franc LIBOR is the average interest rate that banks in London charge for 3-month loans in the CHF currency. When the interest is high, lending decreases, and an increase in consumer savings slows down economic growth. Therefore, an increase in capital flows to the country and provides a boost for the Swiss franc in the medium term.

How to Trade Binary Options with Economic Indicators

Depending on the outcome of a key announcement by a country or company, the market may react differently. It may assume either a positive or a negative sentiment on the economy and currency of the country. In turn, a domino effect is seen in the sentiment and outlook of other markets that depend on other products or countries, perhaps as resources for example. Once trend has been established from a specific sentiment, binary options traders are able to trade based on the announcement and could either buy more of the asset or sell it off and move to safer investments.

Traders use macroeconomic indicators when using country-specific statistics to trade the markets. The binary options trader may specifically look into the deviation to look for market surprises. In such situations, deviations that are significantly higher than the expected figure can provide a reliable and tradable signal. In addition, data released should meet or exceed market expectations to show signs of price growth. The data that fall short of market expectations have a negative connotation, causing prices to fall. When currencies are used as a trading instrument, traders should also know that volatile markets usually favor safer currencies such as JPY.

Lastly, checking for new and specific items and trading specifically mentioned instruments would be the best strategy that would prevent binary options traders from committing generalization errors that result from broad-themed reports. For example, the imposition of added levies on a certain product may indicate that prices will rise. Trading based on this article can be more targeted than, say, an economic release saying that the situation in a certain region where a product is produced is improving. The choice of indicator for a certain instrument leads to accurate predictions of a price change that can definitely affect a trade.

So, if you are a binary options trader, it would be wise to start learning about these macroeconomic indicators and how they affect prices. Meanwhile, we will continue to provide you with educational articles that will help you with your trading.

Read more articles on Education, Strategy.

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