TRADING without reference to economic announcements is a risky bet, even if they are used simply as an indication that it’s time to get out of the market. However, avoid getting bogged down in too much data – as this can obscure the useful with the useless.
Non-farm payrolls, explains Angus Campbell of Capital CFDs, remains the biggest economic data release for the financial markets. This, he says, is because it is so important for the global economy how the labour market in the US is doing. He says: “Every first Friday of the month, clients remain glued to their screens to find out what the number is and take advantage of any big moves on Wall Street.” Campbell notes that only last month “a terrible figure was followed by a move of over 200 points in the Dow, which saw frantic trading throughout the afternoon” (see graph, right, top). Economic indicators have a short shelf-life of a couple of hours, explains Michael Hewson of CMC Markets, which often see a short term “pop” in the markets.
Even if you have no interest in short-term trading, it is impossible to ignore economic indicators, as the reaction to shocks can move markets. SpreadCo’s Ian O’Sullivan says unless you are taking a position, maybe stay away until the dust settles. He thinks the volatility immediately after an economic data release can be exacerbated by illiquidity, as many market makers and participants pull their bids and offers before the news. This can lead to violent spikes one way or the other in the immediate aftermath, which can quickly reverse the other way. “It is not uncommon”, says O’Sullivan, “for ‘fat finger’ trades, or indeed just some traders misinterpreting the significance of the numbers for something like euro-dollar, to shoot higher by 30 or 40 pips, only to tumble right back down and go the other way.” As such, he suggests “you either set yourself very deep stop losses, or be prepared to suffer being stopped out in the volatility around the news.” Of course, if you can time it right, adds O’Sullivan, or play off important support/resistance levels, then you might find yourself filled on a limit order as it pops one way and in a very nice position should it quickly move in the opposite direction.
Without stops as wide as the Nile, there is no ignoring the data. Will Hedden of IG Markets says: “The obvious but important point to note with these is that they will happen overnight and thus can give you a shock – or a slice of luck – if you have held exposure overnight when a big announcement like a GDP figure or interest rate decision occurred.”
Hewson says economic indicators can be used to uncover interesting correlations. He notes that a connection is in evidence between European Manufacturing PMI figures and European Central Bank (ECB) interest rate moves, with the former acting as a leading indicator (See graph right, bottom). Based upon this, Hewson expects the ECB to cut rates as early as next week, if not December.
However, too much information can potentially be as uninformative as too little. The skill is in selecting the right information. Hedden notes: “Analysts and the media love to talk about the Baltic Dry Shipping Index as a barometer of world trade.” This prompts many to ask IG if they can trade it (which they can’t). Hedden says he leans further towards the school of thought that there is too much data. He suggests not worrying about every little thing – just look how many different UK house price indicators there are.
Finding your trading style can take time and inevitably undergoes evolutions – understanding the ways data moves markets should be key to this education.