Logikfx's 'GDP Forex Indicator' calculates the predicted Net Gross Domestic Product Differential (NGDPD), between two distinct national economies.
Using GDP to predict forex prices was a retail trader fantasy, 'till now.
- Marcus, Director at Logikfx
Purpose of GDP in Forex
The gross domestic product (GDP) is a common monetary benchmark of the total production within a country. It simply is an easy way for traders to estimate the growth, and value of an economy. It is considered a lagging (backwards looking) indicator, as it is calculated using historical surveys, reports and trade flows. As such, traders must use GDP growth forecasts to help with their trading decisions. Currencies are heavily influenced by the GDP growth rates each year, and are a strategic tool essential in every forex traders tool box. It's common for traders to then compare the GDP growth between countries, to determine which economy is growing faster or slower. Typically, it's sensible to compare GDP% Growth rates between 2 economies (GDP Differential) to quickly gauge the long-term money flow - Marcus, CEO For example, if a trader is considering the currency pair GBPUSD, a comparison between the United Kingdoms GDP Expected growth and the United States Expected growth will help decide which economy will be growing faster than the other. The idea suggests, if an economy is growing fast than another, generally the money will flow to that economy.
How The Indicator Works
The GDP Forex Indicator uses the Net Gross Domestic Product Differential formula, using forecasts issued by the International Monetary Fund (IMF).
What is Net GDP Differential (NGDPD)?
Net GDP Differential (NGDPD) in the forex markets is the difference between the GDP Growth rates of the two countries. For example, if the U.S. dollar has a 4% growth rate, while the Japanese Yen has a 1% growth rate, the NGDPD would be the difference between 4% and 1%, equalling a 3% differential.
How does Indicator Predicts Forex Price
If the differential is positive, this is a long bias on the currency pair
If the differential is negative, this is a short bias on the currency pair
Therefore, continuing the above example, a positive differential of 3% would generally signal to forex trade that the currency pair GBPJPY will long.
What The Indicator Looks Like
Best ways to use the indicator
The GDP Forex Indicator is best used as tool within a larger strategy, like the 'Global Macro Approach' taught in the logikfx academy. Here are a few tips to get you going:
Always calculate macro currency strength first: It's important to understand the influence of all other economic indicators for each individual currency, before comparing interest rates. This will help increase the confidence level of each forex trade, and the macro currency strength meter does that for you.
Check market positioning before entering a trade: Once you have an idea to long or short using the Interest Rate indicator, and currency strength, you need to determine if there's enough fuel in the market. Generally traders use the Commitments of Traders (COT) Report to do this.
Manage the risk: To maximise the profit made from using the interest rate meter, always set your targets and stop-losses based on the the average volatility of the currency pair.
Finally, as with any tool, meter or indicator, it has its limitations and should be used as part of a wider, more complete system.