How to Trade the US Retail Sales: A Comprehensive Guide
Introduction
The US Retail Sales report provides crucial insights into consumer spending and the overall health of the economy. This guide will share the exact strategy that professional traders use to profit from market movements. By following our step-by-step guide, you’ll learn how to level the playing field and effectively trade the US Retail Sales report.
Understanding the US Retail Sales Report
The Retail Sales report, released monthly by the US Census Bureau, measures the total receipts of retail stores. It includes data on a variety of categories, such as food and beverage, clothing, and automobiles, providing a comprehensive look at consumer spending trends.
Why the US Retail Sales Report Matters
- Tier One Event: The Retail Sales report is a tier one economic event, meaning it has significant implications for the US economy and financial markets. Major deviations from expectations can lead to substantial market movements.
- Economic Indicator: The report reflects the overall health of consumer spending, which accounts for a significant portion of the US GDP. A rising trend in retail sales indicates strong consumer confidence and economic growth, while a declining trend may signal economic challenges.
- Influencing Policy: This report can influence the Federal Reserve's decisions, especially when it highlights trends in consumer spending and economic health. The Fed monitors various economic indicators, including retail sales, to gauge the health of the economy and make informed decisions about monetary policy. Significant changes in retail sales can impact the Fed's stance on interest rates and other monetary measures.
- Investor Confidence: Retail sales data impacts investor confidence and market sentiment. Higher retail sales suggest robust consumer spending and economic expansion, which can boost investor confidence and support market rallies. Conversely, lower retail sales may signal economic challenges and potential slowdowns in consumer spending, which can lead to market sell-offs. Understanding these dynamics helps traders anticipate market reactions.
- Complementary Data: The Retail Sales report adds context and depth to other economic reports, such as GDP growth and employment data, helping traders form a more complete picture of economic conditions. By analyzing retail 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.
Why the US Retail Sales Report Often Moves the Market
- Immediate Impact: Unlike some lagging indicators, the Retail Sales report provides a current snapshot of consumer spending, making it highly relevant for market participants. Significant deviations from expectations can lead to immediate market reactions.
- Market Sensitivity: The US Dollar (USD) is highly sensitive to retail sales data. Unexpected retail sales figures can lead to sharp movements in USD pairs, creating trading opportunities.
- Policy Implications: The Retail Sales report directly influences the Federal Reserve's policy decisions. Traders closely watch retail sales data to anticipate potential changes in monetary policy, such as interest rate adjustments, which can have substantial market impacts.
- Expectations vs. Reality: The market often prices in expectations based on forecasts. When the actual retail sales significantly deviate from these forecasts, it creates opportunities for traders to capitalize on the disparity between expectations and reality.
Core vs. Headline Retail Sales
Understanding the difference between core and headline retail sales is essential for interpreting the data correctly and making informed trading decisions.
- Headline Retail Sales: This figure includes all categories of retail sales, providing a comprehensive overview of total consumer spending. It is the most commonly reported figure and often grabs headlines.
- Core Retail Sales: This figure excludes more volatile categories, such as automobiles, gasoline, building materials, and food services. By excluding these items, core retail sales offer a more stable measure of underlying consumer spending trends.
Why the Distinction Matters:
Understanding the difference between core and headline retail sales is essential for interpreting the data correctly and making informed trading decisions.
- Volatility: Headline retail sales can be influenced by significant changes in the excluded categories, leading to higher volatility. For instance, a surge in auto sales or a spike in gasoline prices can disproportionately affect the headline figure, masking underlying trends in consumer spending.
- Trend Analysis: Core retail sales provide a clearer picture of underlying consumer behavior by filtering out the noise from volatile components. This makes core sales a more reliable indicator for assessing long-term trends in consumer spending.
- Policy Implications: While the Federal Reserve monitors both headline and core retail sales, core sales are often more relevant for gauging the underlying strength of consumer spending and making policy decisions.
Trading Strategy for US Retail 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 consumer spending data, then the Retail Sales report 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
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.
- 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 consumer spending data. If consumer spending is a primary focus, the US Retail 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 30-100 pips for tier one events like the US Retail Sales report, adjusting based on market conditions and volatility. (Note: For tier two events, aim for 15-30 pips.)
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 Retail 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 US Retail Sales report effectively, leveraging the same strategies that professional traders use to profit from this economic data release.