How to Trade the US Core PPI: A Comprehensive Guide

Introduction

The US Core Producer Price Index (PPI) provides valuable insights into the price changes in goods and services at the wholesale level, excluding food and energy. 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 Core PPI report.

Understanding the US Core PPI

The Core PPI, released monthly by the Bureau of Labor Statistics (BLS), measures the average change over time in the selling prices received by domestic producers for their output, excluding food and energy. It provides a clear view of inflationary trends without the volatility caused by the food and energy sectors.

Why Core PPI Matters

Why Core PPI Matters

Trading Strategy for Core PPI

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 our 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. Here’s a more detailed look at why these forecasts are crucial:

Understanding High-Low Forecasts

Economic forecasts are derived from surveys of credible institutions, each providing their best estimate on upcoming data points. Retail calendars typically present the median of these estimates, which can be misleading. The median forecast doesn’t reveal the full range of expectations and, therefore, doesn’t indicate how surprising an actual data release is compared to the extremes of analysts’ projections. In contrast, professional economic calendars include both high and low estimates. This additional information shows the analysts’ expectations at the extreme ends of their projections. Great trading opportunities arise when data releases fall outside these high and low estimates, creating market shocks that move prices significantly.

Step 3 - Choosing the Most Volatile Instrument to Trade

Using insights from institutional reports, traders can select the most responsive currency pairs. For example, if USD/JPY is particularly sensitive to economic data as outlined by the City Economic Surprise Index and the Core PPI shows a significant deviation, this pair could be an ideal target for trading.

Trade Execution Steps

  1. Confirm Fed Focus: Ensure the Federal Reserve is currently emphasizing inflation data. If inflation is a primary focus, the Core PPI report will have a higher likelihood of moving the market. Remember, if the central bank is focused on the data point, it’s because they are using that data point to make a decision on rates. This is the reason data points that are focused on cause volatility.
  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. This strategy ensures you act on genuinely surprising data and there will most likely be a follow-through reaction.
  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 Core PPI, adjusting based on market conditions and volatility.

Step 3 - Choosing the Most Volatile Instrument to Trade

Conclusion

While the US Core PPI report may not always lead to significant market movements, understanding its nuances and using a professional trading strategy can help you capitalize on unexpected deviations. If you don’t have the tools mentioned above, try out our Professional Economic Calendar Package and use institutional tools to level the playing field. By following these steps, you’ll be well-prepared to trade the Core PPI report effectively, leveraging the same strategies that professional traders use to profit from this economic data release.

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