How to Trade the US Existing Home Sales: A Comprehensive Guide
Introduction
The US Existing Home Sales report provides valuable insights into the housing market by tracking the number of previously constructed homes sold during the month. 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 Existing Home Sales report.
Understanding the US Existing Home Sales
The Existing Home Sales report, released monthly by the National Association of Realtors (NAR), measures the sales of previously owned homes. It is a critical indicator of housing market trends and overall economic health.
Why Existing Home Sales Matters
- Housing Market Indicator: The Existing Home Sales report is a crucial economic indicator as it reflects the health and trends of the housing market, which is a significant component of economic growth. An increase in home sales suggests a strong housing market, contributing to economic stability and consumer confidence.
- Influencing Policy: This report can influence the Federal Reserve's decisions, especially when it highlights trends in housing demand and affordability. The Fed monitors various economic indicators, including existing home sales, to gauge the health of the economy and make informed decisions about monetary policy. Significant changes in home sales can impact the Fed's stance on interest rates and other monetary measures.
- Consumer Spending and Confidence: Existing home sales reflect consumer spending and confidence. A higher number of home sales suggests that consumers are willing to invest in real estate, indicating strong economic conditions and positive consumer sentiment. This information is valuable for traders as it provides insights into the broader economic cycle and potential market trends.
- Complementary Data: The Existing Home Sales report adds context and depth to major reports like new home sales and housing starts, helping traders form a more complete picture of economic conditions. By analyzing existing home sales alongside other key economic indicators, traders can develop a more comprehensive understanding of the economy's overall health and make more informed trading decisions.
- Investment and Job Creation: Existing home sales indicate future investment in real estate and potential job creation in related sectors such as construction, home improvement, and real estate services. Understanding these trends can help traders anticipate economic growth and market reactions.
Why Existing Home Sales Matters
- Lagging Data: The Existing Home Sales report reflects past sales activity, which means it may not have the immediacy of real-time data. While it offers insights into housing trends, it is based on completed transactions 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 existing home sales, leading to relatively muted market reactions.
- Market Expectations: The market may already have priced in expectations based on other economic data and forecasts. If the Existing Home Sales 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 Existing Home Sales report is released monthly, which means its impact can be diluted over time. Additionally, the housing sector may not exhibit the same level of volatility as other sectors like manufacturing or services, which can limit the immediate market impact of the report.
- Complementary Role: The Existing Home Sales 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. Traders use it in conjunction with other data to refine their trading strategies rather than relying solely on existing home sales for decision-making.
- Lagging Revisions: Initial Existing Home Sales 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, knowing that revisions could change the overall assessment of housing market trends.
Trading Strategy for Existing Home Sales
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:
- 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. The quick reaction to unexpected data can be the difference between a profitable trade and a missed opportunity.
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 Existing Home Sales report shows a significant deviation, this pair could be an ideal target for trading.
- 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 of an economic data point.
- 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. Good thing you didn’t trade the GBP/USD.
Trade Execution Steps
- Confirm Fed Focus: Ensure the Federal Reserve is currently emphasizing housing data. If housing is a primary focus, the Existing Home Sales 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.
- 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.
- 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.
- 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.
- 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 Existing Home Sales, 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 after your first entry.
- 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 to the highs of the one-minute candle and break. If that doesn’t happen, something could be off.
- 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.
Conclusion
While the US Existing Home Sales 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 Existing Home Sales report effectively, leveraging the same strategies that professional traders use to profit from this economic data release.