Trading binary options means putting together the technical analysis picture and the fundamental one and then taking a decision if buying call or put options. One of the most important economic releases is the GDP or the Gross Domestic Product. The GDP represents the total value of goods and services in an economy and represents the line in the sand for a recessionary economy or an expanding one. A GDP that advances at higher paces will be always followed by the central bank coming and raising the rates, while a GDP that goes below zero shows an economy that is shrinking and normally the central bank will come and cut the interest rates.
The interest rate is the main driver of a currency pair so if one is trading binary options based on a currency pair being the financial product that is traded he/she should always consider the interest rate. During a trading month, or the time between two different monetary policy meetings, the market participants are positioning for what the central banks are going to do when meeting again. In order to have an educated guess about that, traders will look at the economic releases between two central banks meetings to find out clues about what might be possible to happen. As mentioned above, the GDP is one of the most important economic releases and it is released either on a monthly basis or on a quarterly basis.
GDP Interplay with Monetary Policy
All economies have a GDP estimates, so regardless of the currency traded, when the GDP is released we should consider it as it gives us a clue about the interest rate. The recordings that are coming with this educational series here on Binary Options Academy are going to show you the economic calendar and we’re going to look at the GDP in different countries during a trading month, and how the positioning for buying call/put options should be. The GDP (Gross Domestic Product) comes in different versions depending on the country/currency it is referring and this is a vital piece of information as the first release is the one that matters the most.
For example, in the UK the first release is the Preliminary GDP and that is what moves markets because the last release rarely is different than the preliminary so it tends to be overlooked by traders. The same is valid in the United States with the Advanced GDP as markets are rarely moving on that release because already market participants have an idea about it and only if Advanced is different than the previous we will see a move in market.
GDP Components as Indicators of the Economy’s Health
The GDP as an economic indicator represents the total value of goods and services an economy is producing and basically it is on the watching list for the central banks to act on interest rates. When trading, it is all about interest rates as this is the focus traders have. The GDP offers the glimpse into an economy and an overall picture at its strengths and weaknesses.
Let’s try to have an idea how this works. Assuming GDP is printing a negative value, it is obvious the economy is in a recession. In order to fight recession, the central bank at their next meeting will act on interest rates (cutting them) and this is being viewed as a supportive measure. Such a release opens the gates for a vicious circle in the sense that if the economy is in a recession it shows that the consumer is not spending. If consumer is not spending then sales are not rising. If sales are not rising it means inventories are building up on the factory level. If inventories are building up it means factories start to lay off people and this in turns leads to a higher cost for government when it comes to unemployment benefits and all.
Central Banks Policy Smoothing
This vicious circle is the one every central bank is trying to avoid when it comes to establishing a monetary policy and this is the reason why central banks are acting on a pro-active base rather than re-active as being ahead of the curve when it comes to interest rates is vital in avoiding a so called “hard-landing” for the economy. And just like that, the GDP release is one of the most important releases as it offers the view on the state of the economy and allows a trader to have an educated guess about what the central bank is going to do at the next meeting.
The two video recordings that are coming with this chapter in our Binary Options Academy project are dealing with the GDP releases in the most important economies, and are focusing on the release time, the difference between actual and forecast, and how to interpret them based on the number of releases on a quarterly or yearly basis.