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Sweet Spot

Reviewed by Komal | Updated on Feb 19, 2021


What is a Sweet Spot?

A sweet spot is a point where an indicator or policy provides optimum cost-benefit balance. This term is used to refer to circumstances where the best overall economic situation is expected to result from economic data, such as interest rates or employment numbers.

Understanding the Sweet Spot

Interest rates can also be deemed to be in a sweet spot if they maintain inflationary pressures under control, but don't do so at the overall market's cost.

Likewise, when the current employment level in an economy is adequate to spur economic growth without triggering higher levels of inflation by means of wage increases, this can also be called a sweet spot. The sweet spot for such an economy is quite subjective, and for inflation or growing interest, there is no official job balance.

The sweet spot is used in different types of trading to informally refer to ideal entry and exit points based on graph formations or other indicators.

For example, the sweet spot on a head and shoulders formation would be a short position that had entered near the top of the second shoulder after confirmation of the pattern. Although this is not the optimum profitability point, as the reversal is confirmed, there is a higher likelihood of a successful trade.

Nearly every indicator or chart formation has a commonly used sweet spot which acts as a trigger for trade.

A Sweet Spot in the Global Economy

One perceived indication that the economy has hit a sweet spot is the growth in the middle class. After 1800, the world has experienced two great middle-class revolutions, and current times are looking to be the third.

The Industrial Revolution created an economic sweet spot in the 19th century, which gave rise to a considerable middle class in Western Europe and the United States. After World War II another period of middle-class growth occurred, again in Europe, North America, and also in Japan.

Presently, expansion is taking place in emerging markets. For Asia alone, 525 million people have entered the middle class—more than the European Union's total population. Experts believe the middle class will grow by another three billion people over the next two decades, an aggregate from almost entirely from the emerging world.

While a specific national economy is not in a sweet spot, in terms of middle-class growth, the global picture is in a (hopefully) sustained sweet spot.

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