The Myth of Economic Indicators
Remember this sentence:
“Herding behavior rules in the financial speculation and I proved that emotions are the reason of such behavior”
I’m going to use some information that is provided in the book “Sentiment in the Forex market, by Jamie Saettele”
Is there any strong correlation with major economic indicators and US. dollar? I mean NFP, GDP, Trade Balance, PPI, CPI and etc. What is your answer to this question? Do you ever think about it?
Let’s study the word “correlation” first. This word in mathematics is known as “Rational Correlation” and it’s absolutely something about our brain, specifically the Neocortex part of our brain. We are going to think about nature of some facts and with some analysis then we are going to make a formula for that nature and saying that this formula has got a correlation with that nature. Thinking, Analyzing and any processes that involved in these situations need logic and there is not any sign of emotions here.
I proved that emotions are the reason of herding process in financial speculations therefore we can’t say that there is a strong correlation with “X” and “Y” in the financial market, as an instance “X” is Economic indicators and “Y” will be the US. Dollar.
For now I’m going to show you some charts and information that is showing clearly that there are not any correlations between these two things. For this article I’m going to study NFP and GDP data.
This chart has got three parts, the first one is Change in NFP, second one is the chart of USD Index and the third one is the correlation between these two parts. All data is provided during a 3-year period.
It can be seen that sometimes we have positive correlation and sometimes we have negative correlations. Positive correlation means that in that period positive changes or negative changes in NFP had made USD Index strengthen or weaken respectively and negative correlation means that positive or negative changes in NFP had made USD Index weaken or strengthen respectively.
This chart is for the Gross Domestic Products and the first part is the US. Dollar Index chart and the second is monthly GDP data. It’s clear that sometimes we had positive correlations and sometime negative.
All these information is provided to inform you that there is something strange among this market and it is “Sentiment” of market movers.
I’m going to peruse two approaches of finding this mystery in my future articles, Magazine covers and COT report.
Winner’s Edge Trading, as seen on: