How to Trade the US Retail Sales: A Comprehensive Guide
Table of Contents
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.
Coverage Includes:
- Food and beverage
- Clothing
- Automobiles
- Other retail categories
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.
Investor Confidence
Retail sales data impacts investor confidence and market sentiment:
- Higher retail sales suggest robust consumer spending and economic expansion
- Lower retail sales may signal economic challenges and potential slowdowns
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.
Expectations vs. Reality: The market often prices in expectations based on forecasts. When actual retail sales significantly deviate from these forecasts, it creates opportunities for traders to capitalize on the disparity.
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
- Food services
By excluding these items, core retail sales offer a more stable measure of underlying consumer spending trends.
Why the Distinction Matters
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.
Why: The Fed bases its interest rate decisions on key data releases. When the Fed focuses on consumer spending, retail sales reports create market volatility.
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. The quick reaction to unexpected data can be the difference between a profitable trade and a missed opportunity.
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.
- City Economic Surprise Index: Identifies currency pairs that react strongly to economic surprises
- Risk-Reversal Report: Shows market positioning with call/put option buildups
- CFTC Report: Details hedge funds' positions for potential unwinding opportunities
Trade Execution Steps
1. 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.
2. Check Forecast Ranges: Before the data release, review the high and low forecast expectations. 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.
4. Enter Trade Promptly: Once you confirm the deviation, act quickly to enter your trade within the first 30 seconds.
5. Set Stop and Take Profit:
- Stop-Loss: Place your stop-loss below the low of the initial spike candle
- Take Profit: Aim for 20-40 pips for tier one events, adjusting based on market conditions
Key Takeaways
- US Retail Sales is a tier one economic event with significant market impact
- Consumer spending accounts for a large portion of US GDP
- Report influences Federal Reserve monetary policy decisions
- Core retail sales excludes volatile categories (autos, gas, building materials, food services)
- Headline retail sales includes all retail categories
- Step 1: Confirm Fed is focused on consumer spending data
- Step 2: Use high-low forecasts to identify genuine surprises
- Step 3: Select most volatile currency pairs using CFTC, City Index, Risk-Reversal reports
- Enter trades within 30 seconds of data release on significant deviations
- Target 20-40 pips for tier one events with proper stop-loss placement