What effect do economic indicators have on the market?
Economic indicators are key data releases which provide information to traders and investors of the general health of the economy. The importance of this data relates to their influence as fundamental drivers of market direction through influencing sentiment. The most influential key economic indicators include data for the Consumer Price Index (CPI), figures for Gross Domestic Product (GDP), interest rates and, in the US the non-farm payroll (NFP) figures. These indicators not only create volatility across forex and stock markets from the moment of their release but have a lasting impact, underlying the general trend of the market in the longer term.
Using these indicators to trade binary options
Binary options traders can use economic indicators to help base their trading decisions. As many binary options traders’ look for short-term trades the release of this data can provide particularly good opportunities to make profits. Longer term binary options traders may also consider taking a position based on these fundamental indicators and look for a general rise or fall in the markets following, or in anticipation, of the release of the data.
The benefit of binary options when trading with the most important economic indicators is that several can be interpreted directly as either positive or negative. Since traditional binary options require that the binary option expires higher or lower than the strike price, this can present some good medium-term opportunities. On the other hand, there are some economic indicators such as the Non-Farm Payroll figures in the US which often create volatility and wild price swings they ripple through and are interpreted by the markets. These volatile data are most effectively traded using very short term binary options, using the momentum of the data release to enter and exit the market quickly without getting negatively caught out.
Interest rate decisions can be reliable economic indicators to trade with binary options
In terms of binary options traders being able to interpret directly the impact of the indicators, one of the best and most influential indicators in this respect are interest rate decisions. When a central bank raises or lowers its interest rates the currency markets react directly and often move collectively in one direction as the news is interpreted as either positive or negative for the different currency pairs. This provides a good opportunity for binary options traders to trade immediately after the news release, knowing this confirmation of the change in interest rate (the decisions are usually anticipated by analysts in advance) will be reflected in the markets. Another popular technique is to trade binary options when the release of data fails to meet the forecasted expectations. This often provides more volatility and a surge in the value of some currency pairs. Binary options traders in these scenarios can trade the short term momentum and the inevitable correction in the markets when these shocks occur.
Non-farm payroll data and trading binary options
Non-farm payroll data releases are possibly the most volatile of all economic indicators and almost always have an impact on every financial markets. The employment situation in the world’s largest economy is inextricably linked to all economies and this is seen with the wave of activity throughout the markets on the first Friday of each month. Trading binary options before, during or after the release of these can be both risky and rewarding. Taking short and fast momentum trades on the immediate market reaction, perhaps with 60 second options can be profitable as well as purchasing options when the figures deviate from the estimates of economists. Given that the market moves can be substantial and volatile during NFP releases, it is advisable to prepare to hedge your position by purchasing options in the opposite direction should the market falter and your options look to be heading out of the money. Since an average binary option payout is 80% and a losing position returns 15% of the initial investment, this represents only a 5% (rather than 85%) loss for failed trades in volatile and often unpredictable markets.