How to Trade the US Building Permits Preliminary: A Comprehensive Guide
Table of Contents
The US Building Permits Preliminary report provides valuable insights into the future activity in the construction industry. This guide will share the exact strategy that professional traders use to take money from the 95% of losing retail traders.
By following our step-by-step guide, you'll learn how to level the playing field and effectively trade the Building Permits Preliminary report.
Understanding the US Building Permits Preliminary
The Building Permits Preliminary report, released monthly by the Census Bureau, measures the number of new building permits issued for residential construction projects.
It serves as a leading indicator of future construction activity and overall economic health.
Why Building Permits Preliminary Matters
Economic Indicator
The Building Permits Preliminary report is a crucial economic indicator as it reflects future construction activity, which is a significant component of economic growth. An increase in building permits suggests higher future construction activity, contributing to economic expansion.
Influencing Policy
This report can influence the Federal Reserve's decisions, especially when it highlights trends in construction and housing. The Fed monitors various economic indicators, including building permits, to gauge the health of the economy and make informed decisions about monetary policy. Significant changes in building permits can impact the Fed's stance on interest rates and other monetary measures.
Housing Market Health
Building permits are a leading indicator of the housing market's health. An increase in permits suggests a strong housing market, which is critical for economic stability and growth. This information is valuable for traders as it provides insights into the housing cycle and potential market trends.
Complementary Data
The Building Permits Preliminary report adds context and depth to major reports like housing starts and existing home sales, helping traders form a more complete picture of economic conditions. By analyzing building permits alongside other key economic indicators, traders can develop a more comprehensive understanding of the economy's overall health.
Investment and Job Creation
Building permits indicate future investment in construction and potential job creation in the construction sector. Understanding these trends can help traders anticipate economic growth and market reactions.
Why Building Permits Preliminary Often Won't Move the Market
Understanding when and why this report may not create significant market movements is crucial for effective trading.
Lagging Data
The Building Permits Preliminary report reflects future construction activity but may not have the immediacy of real-time data. While it offers insights into future trends, it is based on permit issuance and may not fully capture current market dynamics.
Tier 2 Status
It's not as prominent as high-impact reports like the Non-Farm Payrolls (NFP) or Consumer Price Index (CPI), so it usually doesn't create significant market waves. Traders often prioritize these more influential economic indicators over building permits.
Market Expectations
The market may already have priced in expectations based on other economic data and forecasts. If the Building Permits Preliminary report comes in line with or close to expectations, it might not cause significant market movements. Significant deviations from expectations are required to generate notable market reactions.
Frequency and Volatility
The Building Permits Preliminary report is released monthly, which means its impact can be diluted over time. Additionally, the construction sector may not exhibit the same level of volatility as other sectors like manufacturing or services.
Complementary Role
The Building Permits Preliminary report often serves as a complementary data point rather than a primary market mover. It adds valuable context to the broader economic picture but may not have the same standalone impact as other major economic indicators.
Lagging Revisions
Initial Building Permits Preliminary readings can be subject to revisions in subsequent releases. These revisions can alter the initial market interpretation of the data. Traders may be cautious in reacting strongly to the initial release.
Trading Strategy for Building Permits Preliminary
Step 1: Analyze Federal Reserve Priorities
The first step is to understand what data points the Federal Reserve is currently focused on. If the Fed is focused on this piece of data, then the data point will have a significant amount of volatility because the Fed is in some way basing its interest rate decisions on that data release.
To quickly determine the Fed's current focus, you can use a Professional Economic Calendar, which includes a fundamental guide. This resource helps traders stay updated on the data points that matter most to the Fed, providing a strategic advantage.
Step 2: Use High-Low Expectation Forecasts
Professional traders rely on high-low forecasts to gauge market expectations accurately.
Institutional Forecasts
Professional economic calendars include high and low estimates from top institutions. This broader range of expectations offers a more comprehensive picture of potential outcomes.
Market Shocks
When a report exceeds the high estimate or falls below the low estimate, it's a huge shock to markets because no analyst expected it. Such deviations often result in sharp market movements.
Lightning Bolt Feature
This tool immediately signals a deviation above the high or below the low of analyst expectations. When a deviation occurs, the lightning bolt feature alerts traders instantly, allowing them to act without delay.
Important: Retail calendars typically present the median of forecasts, which can be misleading. Professional economic calendars include both high and low estimates, showing the analysts' expectations at the extreme ends. Great trading opportunities arise when data releases fall outside these high and low estimates.
Step 3: Choosing the Most Volatile Instrument to Trade
Using insights from institutional reports, traders can select the most responsive currency pairs.
City Economic Surprise Index
This report identifies currency pairs that react strongly to economic surprises. It highlights pairs that are sensitive to data deviations, helping traders focus on the most responsive markets.
Risk-Reversal Report
This report shows market positioning, revealing a buildup of call or put options on certain currency pairs. Understanding these positions helps traders choose a pair that may have orders susceptible to getting liquidated upon the release.
CFTC Report
This report details hedge funds' positions; if a lot of big players are long the EUR/USD but then data comes out in favor of the USD, some of those funds might have to unwind their positions leading to an outsized move.
Trade Execution Steps
1. Confirm Fed Focus
Ensure the Federal Reserve is currently emphasizing housing and construction data. If housing is a primary focus, the Building Permits Preliminary report will have a higher likelihood of moving the market.
2. Check Forecast Ranges
Before the data release, review the high and low forecast expectations for the event. Plan to trade only if the actual data significantly exceeds the high estimate or falls below the low estimate.
3. Monitor Revisions
Check for any conflicting revisions in the data, as these can alter the initial market reaction. Make sure the primary release and any revisions align to support your trade.
4. Enter Trade Promptly
Once you confirm the deviation, act quickly to enter your trade. Enter within the first 30 seconds. Speed is crucial, as market reactions to significant data surprises happen rapidly.
5. Set Stop and Take Profit
- Stop-Loss: Place your stop-loss below the low of the initial spike candle to protect against adverse movements.
- Take Profit: Aim for 15-30 pips for tier 2 events like Building Permits Preliminary, adjusting based on market conditions and volatility.
Managing the Trade
After the Initial Run
Look for a shallow pullback around a 23% Fibonacci retracement or near support/resistance levels. This initial pullback can provide an opportunity to enter the trade again after you've taken a few points off the table.
Break Even
Move your stop-loss to break even as soon as possible to protect your gains. The stronger the release, the shallower the pullback. Moving to break even is essential because the market should want to buy off your S&R level and continue.
Reentries
If your initial position is stopped out at break even, consider reentering at deeper retracements, such as the 38% or 50% Fibonacci levels. Use nearby support and resistance levels to guide your reentry points.
Key Takeaways
- Building Permits Preliminary released monthly by Census Bureau measures new permits for residential construction
- Leading indicator of future construction activity and overall economic health
- Can influence Federal Reserve decisions on interest rates when housing is a focus
- Tier 2 status means typically less market impact than NFP or CPI
- Professional strategy: Step 1 - Analyze Fed priorities; Step 2 - Use high-low forecasts; Step 3 - Choose volatile instrument
- Trade only when actual data exceeds high estimate or falls below low estimate (market shock)
- Enter trade within 30 seconds of deviation confirmation for best execution
- Stop-loss below initial spike candle low; take profit 15-30 pips for tier 2 events
- Move to break even ASAP; look for 23% Fibonacci pullback for reentry opportunities