Strategy based on the Retail Sales Indicator (Forex Education)

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By Rahul Jain | August 27, 2010 3:23 AM EST

Forex traders formulate their trading strategies based upon technical indicators and fundamental or macroeconomic indicators. If a trader favors the fundamental approach, he'll be glued to daily, monthly, and quarterly economic reports to help him determine his next trading strategy. In fact, most online trading systems provide daily business journal news any time, day or night. One of the main areas that are analyzed for strategic planning is the retail sales indicator.

Defining the Retail Sales Indicator

The retail sales indicator measures retail sales activity during each and every month, with a lag time of approximately two weeks. That retail sales number is calculated based on a sample of retail companies throughout the country. Compared to other indicators, like the Gross Domestic Product (GDP), the retail sales indicator is an extremely timely report that can greatly benefit and influence trade decisions. When the retail sales indicator rises (increased sales), it means that consumers have confidence in the economy. When retail sales fall, it means that consumers are weary of spending and the consumer confidence is weak.

The "Street" Number

However, analysis of the retail sales indicator isn't so straightforward. The "consensus" or "street" number needs to be taken into consideration. This number relates to what the "street" expects the retail sales numbers to be. If the actual number is much greater than the expected or "street" number, then that could signal inflationary pressures. Inflationary pressures in turn could cause higher interest rates, and higher (or lower) currency rates, depending upon the overall direction and sentiment of the country. On the other hand, if retail sales are lower than the "street" number, then a recession might be in the horizon, which would more than likely lower currency rates.

Flexibility of Reporting

The retail sales report is extremely practical - it allows the user to remove the unstable sales components to get a true picture of consumer confidence. Such volatile areas as auto sales and gas prices can easily be removed from the retail sales statistics.

What the Retail Sales Indicator Doesn't Measure

The retails sales indicator doesn't measure the amount of consumer expenditures in the service sector (i.e. entertainment, hotel stays, etc.). Even though that percentage represents roughly have of all consumer expenditures, the retail sales indicator is still a powerful tool to gauge overall consumer confidence.

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