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Trading the Non-Farm Payroll Report
The non-farm payroll (NFP) report is a key economic indicator for the United States. It is intended to represent the total number of paid workers in the U.S. minus farm employees, government employees, private household employees and employees of nonprofit organizations.
The non-farm payroll report causes one of the consistently largest rate movements of any news announcement in the forex market. As a result, many analysts, traders, funds, investors, and speculators anticipate the NFP number and the directional movement it will cause. With so many different parties watching this report and interpreting it, even when the number comes in line with estimates, it can cause large rate swings. Learn how to trade this move without getting knocked out by the irrational volatility it can create.
- Non-farm payrolls (NFP) are an important economic indicator related to employment in the U.S.
- Understanding this data release can help set up forex trades to take advantage of unexpected changes in employment.
- Technical analysis can be employed to the NFP report using 5- or 15-minute chart intervals.
Analyzing the Non-Farm Report Numbers
Like any other piece of economic data, there are three ways to analyze the U.S. non-farm payroll number:
- A higher payroll figure is good for the U.S. economy. This is because more job additions help to contribute to healthier and more robust economic growth. Consumers who have both money and a job tend to spend more, leading to growth. As a result, foreign exchange traders and investors look for a positive addition of at least 100,000 jobs per month. Any release above—let’s say 200,000—will help to fuel U.S. dollar gains. An above-consensus estimate release will have the same effect.
- An expected change in payroll figure causes a mixed reaction in the currency markets. Forex investors witnessing an expected change in the NFP report will turn to other sub-components and items to gain some sort of direction or insight. This includes the unemployment rate and manufacturing payroll sub-component. So, if the unemployment rate drops or manufacturing payrolls rise, currency traders will side with a stronger dollar, a positive for the U.S. economy. But, should the unemployment rate increase, manufacturing jobs decline, investors will drop the U.S. dollar for other currencies.
- A lower payroll figure is detrimental for the U.S. economy. Like any other economic report, a lower employment picture is negative for the world’s largest economy and the greenback. Should the NFP report show a decline below 100,000 jobs (or a less-than-estimated print), it’s a good sign the U.S. economy isn’t growing. As a result, Forex traders will favor higher-yielding currencies against the U.S. dollar.
What Does Nonfarm Payroll Mean?
Trading News Releases
Trading news releases can be very profitable, but it is not for the faint of the heart. This is because speculating on the direction of a given currency pair upon the release can be very dangerous. Fortunately, it is possible to wait for the wild rate swings to subside. Then traders can attempt to capitalize on the real market move after the speculators have been wiped out or have taken profits or losses. The purpose of this is to attempt to capture rational movement after the announcement, instead of the irrational volatility pervading the first few minutes after an announcement.
The release of the NFP generally occurs on the first Friday of every month at 8:30 a.m. EST. This news release creates a favorable environment for active traders because it provides a near guarantee of a tradable move following the announcement. As with all aspects of trading, whether we make money on it is not assured. Approaching the trade from a logical standpoint, based on how the market is reacting, can provide us with more consistent results than simply anticipating the directional movement the event will cause.
The NFP Trading Strategy
The NFP report generally affects all major currency pairs, but one of the favorites among traders is the GBP/USD. Because the forex market is open 24 hours a day, all traders have the ability to trade the news event.
The logic behind the strategy is to wait for the market to digest the information’s significance. After the initial swings have occurred, and after market participants have had a bit of time to reflect on what the number means, they will enter a trade in the direction of the dominating momentum. They wait for a signal indicating the market may have chosen a direction to take rates. This avoids getting in too early and decreases the probability of being whipsawed out of the market before it has chosen a direction.
The strategy can be traded off of five- or 15-minute charts. For the rules and examples below, a 15-minute chart will be used, although the same rules apply to a five-minute chart. Signals may appear in different timeframes, so stick with one or the other.
- Nothing is done during the first bar after the NFP report (8:30 to 8:45 a.m. in the case of the 15-minute chart).
- The bar created at 8:30 to 8:45 will be wide-ranging. Traders wait for an inside bar to occur after this initial bar (it does not need to be the very next bar). In other words, they are waiting for the most recent bar’s range to be completely inside the previous bar’s range.
- This inside bar’s high and low rate sets up our potential trade triggers. When a subsequent bar closes above or below the inside bar, market participants take a trade in the direction of the breakout. They can also enter a trade as soon as the bar moves past the high or low without waiting for the bar to close. Whichever method you choose, stick to it.
- Place a 30-pip stop on the trade you entered.
- Make up to a maximum of two trades. If both get stopped out, don’t re-enter. The inside bar’s high and low are used again for a second trade if needed.
- The target is a time target. Generally, most of the move occurs within four hours. Thus, traders exit four hours after their entry time. A trailing stop is an alternative if traders wish to stay in the trade.
Figure 1: February 6, 2009. GBP/USD 15-minute chart. Time is GMT. Source: Forexyard
Looking at Figure 1, the vertical line marks the 8:30 a.m. EST (1:30 p.m. GMT) release of the NFP report. As you can see from the chart, there are three bars, or 45 minutes, of back-and-forth action following the release. During this time, traders do not trade until they see an inside bar. The inside bar has a square around it on the chart. This bar’s price range is fully contained by the previous bar. Traders will enter when a bar closes higher or lower than the inside bar. The next bar’s close is circled, as that is their entry; it closed above the inside bar’s high. Their stop is 30 pips below the entry price, which is marked by a solid black horizontal bar.
Because their entry occurred at approximately at 9:45 a.m. EST (2:45 p.m. GMT), they will close out their position four hours later. By entering the trade at 1.4670 and exiting four hours later at 1.4820, 150 pips were captured while risking only 30 pips. However, it should be noted not every trade will be this profitable.
While this strategy can be very profitable, it does have some pitfalls to be aware of. For one, the market may move in one direction aggressively and thus may be beginning to fade by the time we get an inside bar signal. In other words, if a strong move occurs prior to the inside bar, it is possible a move could exhaust itself before we get a signal. It is also important to note in high volatility times, even after waiting for a pattern setup, rates can reverse quickly. This is why it very important to have a stop in place.
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The Bottom Line
The logic behind this strategy of trading the NFP report is based on waiting for a small consolidation, the inside bar, after the initial volatility of the report has subsided and the market is choosing which direction it will go. By controlling risk with a moderate stop, we are poised to make a potentially large profit from a huge move that almost always occurs each time the NFP is released.
Forex Strategy for Day Trading the Non-Farm Payrolls (NFP) Report
Here is a strategy for day trading the EUR/USD forex pair when the non-farm payrolls data is released on the first Friday of every month. The strategy includes what to do prior to the release, how to enter a position and in which direction, how to control risk and when to take profits. It also addresses position size (how big or small of a position you take) as this is part of risk management.
The non-farm payrolls report is one of the most-anticipated economic news reports in the forex market. It is published the first Friday of the month at 8:30 AM Eastern time by the U.S. Bureau of Labor Statistics. The data release actually includes a number of statistics, and not just the NFP (which is the change in the number employees in the country, not including farm, government, private and non-profit employees). Another metric included in the data release is the unemployment rate.
As one of the most-anticipated economic news events of the month, currency pairs (especially those involving the US dollar) typically see big price movements in the minutes and hours after the data is released. This makes it a great opportunity for day traders with a sound strategy to take advantage of the volatility. Below is a step-by-step forex strategy for trading the NFP report.
Trade the EUR/USD After the NFP Report
The EUR/USD is the most heavily traded currency pair in the world, and therefore it typically provides the smallest spread and ample price movement for making trades. There is little reason to day trade another pair during the NFP report.
Close all prior day trading positions at least 10 minutes prior to 8:30 AM ET when the data is scheduled to be released. For this strategy we DO NOT take positions before the announcement, rather we do nothing until the NFP numbers are released. When that occurs the price will see a big rise or decline which typically lasts for a few minutes (sometimes more). During that initial move we do nothing, we just wait.
For this strategy, use a 1-minute EUR/USD chart.
Initial Move Establishes First Trade Direction
Just after 8:30 AM ET the price will rise or fall rapidly, typically at least 30 pips or more within a couple of minutes. The bigger this initial move the better for day trading purposes.
The initial move gives us the trade direction (long or short) for our first trade. If the price moves more than 30 pips higher, we will want to go long. but only IF and WHEN we get a valid trade setup, which is discussed shortly.
If the price drops more than 30 pips, in the few minutes after the 8:30 AM release, then we will be looking to go short for our first trade. when and if a trade setup occurs.
In figure 1 (click for larger version) the price moves aggressively higher in the few minutes after 8:30 AM. That means we will be looking to buy when a trade setup occurs. The times on the chart are GMT, not ET. Therefore, 15:30 is when the news was released on the attached charts.
Wait for This Trade Setup
The initial rise or fall in the moments after 8:30 AM lets us know in which direction we will be trading. The next step is to wait for a trade setup. A trade setup is a sequence of events that must unfold in order for us to get into a trade. Since there is often a lot of volatility surrounding the news, we will look at a few variations of the setup, as no two days are ever exactly alike.
Here is what we are waiting for:
- After the initial move of 30 pips or more, there must be a pullback of at least 5 one-minute price bars. This means that if the initial move was up, we want to see the price drop off the high of the initial move and stay below that for at least 5 bars (they don’t all need to be down bars). Preferably the pullback makes significant downward progress, but it must not drop below the 8:30 AM price where the initial move began. If the initial move was down, we want to see the price rally off the low of the initial move and stay above low that for at least 5 bars. Preferably the pullback makes significant upward progress, but it must not rise above the 8:30 AM price where the initial down move began.
- By waiting for at least a 5-price-bar pullback you can draw a trend line across the highs of the price bars (if the initial move was up) or across the lows of the price bars (if the initial move was down). Note: you are drawing the trendline on the price bars that compose the pullback.
- If the initial move was up, buy when the bid price breaks above the trendline. If the initial move was down, enter a short trade when the bid price moves below the trendline.
This is the simplest form of the strategy and is useful in most situations. Unfortunately, it is quite general, so occasionally the pullback may not provide a trendline that is useful for signaling an entry. In such cases, the alternative entry discussed in the next section may be helpful.
- If a long trade is taken, place a stop loss one pip below the recent low that just formed prior to entry.
- If a short trade is taken, place a stop loss one pip (plus the size of your spread) above the recent high that formed prior to entry.
Figure 2 (click for larger version) shows the strategy at work. The initial move was up, so we want a long trade. There is a pullback that lasts at least 5 bars, and the trendline is drawn along the price bar highs that compose the pullback. The price then breaks above the trendline signaling a buy. A stop-loss is placed one pip below the low of the pullback that just formed.
Alternative Trade Setup(s)
After the initial move, if the price pulls back more than half of the distance of the initial move (before breaking the pullback trend line and signaling an entry) then this alternative method can be used.
- Once the price has pulled back more than 50% (can use a Fibonacci retracement tool), wait for the price to consolidate for at least two price bars. That means the price moves sideways for at least two minutes. Draw a line along the high and low prices of those two price bars once the second bar completes and the third bar is starting to form.
- If the initial move was up, buy if the bid price moves above the high of the consolidation (the line you just drew). If the initial move was down, enter a short trade if the bid price drops below the low of the consolidation.
- If a long trade triggers, place a stop loss one pip below the low of the consolidation.
- If a short trade triggers, place a stop loss one pip (plus the size of your spread) above the high of the consolidation.
Figure 3 (click for larger image) shows an example of this strategy. The price rallies so we are looking for a long trade. The price pulls back and consolidates, but then it drops instead of rallying above the consolidation. In this case, there is no trade, because the price does not move above the high of the high of consolidation. As long as the price stays above where the initial move began we can continue to look for long trades.
In figure 3 the price doesn’t stay above where the initial move began. This sets up another alternative trade. If the price moves at least 15 pips past where the initial move began, we can look for a trade in this new direction, following a pullback. In figure 3 the price initially rallies but then collapses and moves more than 15 pips below where the initial move started. This big drop means we are now looking for short trades. When the price starts to pull back, look for either of the entry signals outlined in this section or the one above.
The price target has also been included in figure 3. How to establish the price target is discussed next.
Establishing a Profit Target
Because of the volatility surrounding the news announcement, how far the price moves from the 8:30 price can vary dramatically from one NFP day to the next. Sometimes it only moves 50 pips within a couple hours, other times it moves 300 pips or more in an hour or two.
That said, the initial move is all we have to give us some idea of how volatile the EURUSD is in response to this NFP report.
Since we are waiting for a pullback before taking a trade, once that pullback starts to occur, measure the distance between the 8:30 price and the high or low of the initial move (if the price starts jumping at 8:29 in the same direction, include that). This should be at least 30 pips or more.
Now, cut that number in half. For example, if the price moved 43 pips in the initial move, cut that in half and you are left with 21.5 pips. That latter number is how many pips away you will place your target (an offsetting order to exit the trade at a profit) from your entry price.
Figure 4 (click to see larger version) shows one of the same trades we looked at prior. In this case, the size of the initial move is 115 pips. Cut in half, our “profit target” is 57.5 pips.
Figure 3 also shows an example of the profit target method. In that case, the initial move was 56 pips, so cut in half, you are placing a profit target 28 pips away from the entry.
The Risk/Reward and Position Size
Before any trade occurs you know your entry price. because you know the high or low of the consolidation or the price where the trendline will be broken. Note that since trendlines are sloping the breakout price will change every bar.
You also know your stop loss location because you know where the recent high/low was prior to your entry. You also know your profit target because the initial move has already happened.
The difference between your stop loss and entry is your ‘trade risk’ in pips. The difference between your profit target and the entry point is your ‘profit potential’ in pips.
Only take a trade if your profit potential is at least 1.5x your trade risk. Ideally, it should be 2x or more. In the examples above the profit potential is about 3x the trade risk.
Position size is also very important. Only risk 1% of your capital on a trade. That means your trade risk, multiplied by how many lots you buy, shouldn’t be more than 1/100 of your account. For example, if you have $5,000 account, you can risk up to $50 per trade (1% of $5,000). If the trade risk is 20 pips, then your position size should be no larger than 2.5 mini lots (that means taking a trade worth $25,000, which will require leverage). With a 2.5 mini lot position, if you lose 20 pips you will lose $50. If your position size is bigger than that, you will lose more than $50, which isn’t advised for this account size.
How to Determine Proper Position provides more example of how to calculate the perfect position size.
ADAPT the Method, Don’t Copy It
The method described above is a guideline. It is impossible to describe how to trade every possible variation of the strategy that could occur. This why demo trading the strategy, before live trading, is encouraged. Understand the guidelines and why they are there, so if conditions are slightly different on a particular day you can adapt and won’t be frozen with questions.
For example, above we stated that if the price initially moves more than 30 pips in one direction, but then reverses and moves 15 pips beyond the other side of the 8:30 price, we will now look for trades in this new direction. 15 pips are just a guideline because it helps to show that the momentum has totally shifted it. That may be evident before the price moves 15 pips beyond the 8:30 price, or sometimes it may require more of a move to signal the reversal has really occurred (for example if the price is just whipsawing back and forth. Seeing the reversal is what matters, not the15 pips.
If the initial move was down, but the price stalls out and makes several attempts to move lower but can’t, and then has a huge and sharp move to the upside, that is a reversal. The bias should be to take long trades. even if the rally is still below the 8:30 price.
Trade the strategy several times and understand the logic for the guidelines. That will make you much more adaptable, and you will be able to adapt the strategy to almost any condition that may develop while trading the aftermath of the NFP report.
You may also find that under certain conditions the target price isn’t realistic for the movement the market is seeing. Depending on the entry price, the target may be way out of the realm of possibility, or it may be extremely conservative. Again, adapt to the conditions of the day. If the profit target seems way out of wack, use a 3:1 reward to risk target instead. The goal is to place the target at a logical and reasonable location based on the trend and volatility. The profit target method helps do that, but it is only a guideline and may need to be adjusted slightly based on the conditions of the day.
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The US Non-farm payroll report, which is part of the Department of Labor’s monthly release of employment figures, is considered one of the most important economic data points released during the course of the month. Changes in job growth can alter the direction of multiple markets, change overall sentiment and effect how investors view economic growth. Job growth directly feeds into consumer sentiment providing the backdrop for increased consumer spending. With consumer spending making up approximately 65% of Growth Domestic Product (GDP) in the United States, the payroll report becomes an increasing important piece of the economic puzzle.
The Non-farm payroll release date occurs on the first Friday of every month. If the first Friday is the first day of a month, for example November 1, then the Non-Farm Payroll data will be released by the Bureau of Labor Statistics on the second Friday of the month. Another scenario for the NFP dates is if the first Friday is a national holiday in the United States, the US NFP data will be released on the second Friday of the month.
The monthly NFP report describes the employment situation in the United States by reflecting the number of net new jobs that have been produced during the course of the past month. The NFP figures is timely, and is calculated by using a survey that is taken by corporations about their employment practices during the prior month. The non-farm payroll numbers are released alongside the unemployment rate, which is measured by a household survey of employment.
The NFP news report is a time series that is reported by the Bureau of Labor Statistics (BLS), and is considered to be one of the best guides to total employment in the United States. The Non-farm payroll numbers are based on a monthly sampling of specific corporate businesses. Then the government interprets these numbers in a few days against quarterly numbers that are less timely. The monthly payroll figures involve some forecasting by the BLS. While these estimates are reasonable, the month to month changes are quite noisy generating volatility within the time series.
The reason the NFP is so important is that jobs data drives momentum in economic growth. When jobs are produced, sentiment starts to gain momentum and consumers will begin to spend more freely. Since nearly two-thirds of gross domestic product in the United States is driven by consumer spending, it is clear why job gains are so important.
The biggest challenge for the BLS in generating a monthly report is in taking into account companies that go out of business and others which are newly formed. The initial calculation is rendered using the revised employment figures from the prior month to generate a benchmark for comparison purposes. The BLS assumes that employment is continuous. Once the prior month’s revision is calculated the BLS can use a ‘birth-death model’, which is the government’s estimate of net new businesses vs closed businesses for the period.
The Unemployment Rate
On the same day the BLS reports the NFP, they also report a separate employment report called the household survey. The U.S. unemployment rate is defined as the number of individuals actively searching for a job calculated in terms of the percent of the entire labor force. This figure is calculated separately from the non-farm payroll report. Each month, the BSL announces the total number of unemployed as well as employed individuals based on the number of employed and unemployed people in the United States for the previous month. This analysis reflects the percentage of the labor force that is unemployed.
You may be wondering why the BLS does not use the initial unemployment insurance figures to determine the unemployment rate. One of the reasons is that there are many individuals that are unemployed when their unemployment insurance runs out, which would make the calculation unreliable.
The Labor Department provides a plethora of data every month, but most of the information is not of interest to most traders. The unemployment rate is also known as the U-3 number, and it is defined as the total number of individuals that are unemployed as a percent of the entire labor force. While this appears on the surface to be straight forward, the U-3 does not include a wide variety of employment scenarios. A wider measure of unemployment is known as the U-6 number which some consider a more accurate description of the employment situation in the United States.
The U-6 unemployment rate is defined as the number of unemployed individuals along with people that are underemployed that are still attached to the labor market, but might be working in temporary jobs or part time jobs for specific reasons. This number is then compared to the total labor force and calculated as a percentage. The number takes into account those who are under employed.
The U-6 unemployment rate is more volatile than the U-3 rate, as calculating those who are underemployed, can shift quickly over a couple of months and can whipsaw much more than the U-3 unemployment rate.
In general, you would assume that a decline in the unemployment rate usually means that there are less individuals that are unemployed. Unfortunately, this not always the case.
This is because the unemployment rate is made up of those who are unemployed as a percentage to the total number of individuals looking for a job.
If the participation rate (those looking for a job) increases, the unemployment rate can move lower if the number of unemployed as a percent stays the same. For example, if you have 100 people and 5 are unemployed your unemployment rate is 5%. If the participation rate increases to 110, but 5 are still unemployed the rate will drop to 4.5%, with the number of people unemployed remaining the same.
The participation rate is a key component because it tells you the number of people who are trying to find a job. These people are either out of work completely or underemployed. What is not included in the participation rate is those who do not want to work at all, or those who are unable to work, for example a student or a stay at home mom or dad. The unemployment rate is generally looked at in conjunction with the participation rate. The two rates will help determine who is classified as unemployed and those who are not active participants.
During a recession the participation rate is a key component. The participation level generally falls during a protracted recession as individuals become discouraged by the difficulty they are having finding a job. This could make the participation rate decline as many are not actively seeking employment or find multiple part-time jobs that satisfy the expenses they need to cover.
Wages are a Key Component of the Non-Farm Payroll Report
Job gains can also push wages higher. This is very important to the Federal Reserve as wage gains are one of the key elements tracked by the Fed to determine if they need to increase or decrease interest rates. The Fed has a dual mandate when controlling monetary policy. They use a combination of growth and inflation to determine if there needs to be a change.
While there are many economic indicators such as personal spending and retail sales, along with CPI and PCE that will alter the course of the capital markets, the NFP is the most significant, as it reflects sentiment, inflation and potential growth all in one number.
Trading the NFP
The NFP report provides keys statistics for currency traders. There can be substantial volatility in the forex market after the NFP release, which can cause large gyrations for major currency pairs. In addition during these volatile periods it may difficult to obtain tight bid ask spreads from you FX Broker, or even execute your forex orders in the market efficiently.
The combination of reporting a number that provides insight into potential consumer spending and the rate of inflation makes the NFP one of the key numbers produced on a monthly basis to capital markets traders.
A stronger than expected number will usually increase interest rate levels, which could spill over into the US dollar as well as the US equity markets. The Federal Reserve only controls the short end of the interest rate curve, but the market controls the longer end.
Since the NFP report pertains to the United States, and since the majority of the liquidity that is trading in the foreign exchange market on a daily basis involves the US Dollar, those currency pairs with the Dollar will typically show the most pronounced effects from the NFP release.
As mentioned, the non-farm payroll report is a key metrics used by the Federal Reserve to determine interest rate movements. The Federal Reserve has a dual mandate which differs from other central banks around the globe. The Fed needs to focus on inflation as well as full employment, while most other central banks only focus on inflation. The Fed evaluates the NFP headline number which reflects the total number of new jobs created in a month as well as other factors such as wage growth.
If the NFP numbers are strong, the Federal Reserve is more likely to be hawkish toward interest rates, and lean toward tighter liquidity. If the NFP numbers are weak, the opposite will occur and the Fed will be dovish and lean toward adding stimulus. Job growth is essential to generating a robust U.S. economy, and therefore this report can drive market sentiment for days, weeks or even months.
If the Federal Reserve is planning on increasing interest rates, this makes the U.S. dollar more attractive relative to its peers. The differential between the U.S. interest rates and another countries interest rates will move in favor of the greenback. This makes the dollar more attractive and generally leads to an exchange rate move in favor of the dollar. Obviously the reverse is also true. If the Fed leans toward reducing interest rates, then the interest rate differential will move against the U.S. dollar and make the greenback less attractive.
Given the volatility surrounding a payroll report, there are a number of ways professional investors can trade around this report. Trading prior to the Non-farm payroll report is generally stable and active, but immediately after the report, markets that are effected can become very volatile. Here are some of the strategies used by traders ahead of or immediately after the NFP report is released.
Wait Until The Dust Settles
Stocks, interest rates, and currency pairs generally gyrate when the actual NFP report differs from what was expected by economists. Prior to the report, economists from many of the most renowned investment and commercial banks estimate what the BLS will report.
Most professional traders are aware of what is expected by the market. When the number is released by the Bureau of Labor Statistics, prices can quickly jump to new trading ranges if expectations differ substantially from the actual number. Traders must decide, at that point, the most suitable course of action. Entering a position prior to the release of the NFP number means that you believe that the actual release will be either less than or greater than expectations.
The results of the NFP data can help you determine or confirm a specific direction for a currency pair. For example, if you are already bullish on the Dollar, and the market expects a headline NFP number that is 100K and instead the actual release shows 200K, the dollar is likely to gain traction. You can then use that information to further bolster your trade conviction, and position yourself to find an appropriate trade entry after the initial volatility begins to level off.
Jump in Right After the NFP Number
Many times the initial move the currency pair makes over the first 5 minutes after the NFP report, is the likely direction the market will continue to move, at least in the short run.
By jumping into a position that is in line with your view that is confirmed by the NFP number can be a lucrative way to play the NFP release. The risk with this strategy is that the market can have a knee jerk reaction, and for the first half hour or hour, trades in one direction, but then eventually loses steam and moves in the opposite direction.
Prior to jumping in with the momentum right after the NFP number, you should evaluate where the market has come from. You are likely to have a better chance of success if sentiment was in the opposite direction prior to the release.
So, if the dollar had been moving lower and you receive a much better than expected number, you are more likely to generate a profitable trade, by following the initial momentum, then a scenario where the dollar was improving and then the number was better than expected.
Using Options to Trade NFP Data
Options are financial instruments that can have unlimited upside potential, but limit your downside risk.
A call options is the right but not the obligation to purchase a currency pair at a fixed strike price on or before a specific date. A put option is the right, but not the obligation to sell a currency pair at a fixed strike price on or before a certain date. For this right you pay an upfront premium, which is the most you can lose if the trade goes against you.
For trading the NFP report, some traders prefer leveraging short term Options.
For example, an option will pay an investor if the USD/JPY is greater than the current price within the next 60 minutes. If you believe that the Nonfarm payroll number will be greater than expected, you can limit your risk by purchasing a USD/JPY call option that expires soon after the NFP number. The reverse is true if you think the number will be less than expectations, and in that instance you can purchase a put option.
While there are many ways to trade around the NFP report, what is clear is this is likely the most important piece of economic data that is released within the U.S., on a monthly basis. And as we have discussed, the Non-farm payroll report directly feeds into the interest rate decisions that are made by the Federal Reserve. Higher interest rates relative to other countries are generally beneficial to a currency, so higher U.S. rates generally equate to a higher greenback.
The NFP report usually creates significant volatility, which means that news oriented and technical traders alike should have a specific trading plan on how will interact with the market around these trading times.
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How to Trade NFP Forex: Non-Farm Payroll Quick Guide
There is almost nothing in the Forex market that can create as much volatility and explosive price movement as the non-farm payroll announcement.
Whilst price often dawdles and does nothing exciting leading into the announcement, come the release time it is not unusual to see price explode through key support or resistance levels.
The charts below are of the GBPUSD and AUDUSD 5 minute charts and how price was affected after the NFP Forex release.
You will note that leading into the announcement price is relatively quiet and is moving sideways and ranging as people watch and wait and then it explodes.
A lot of traders love the NFP because it is at the end of the week, affects the biggest USD pairs, is hotly anticipated and can create huge moves. When it is released the market can make you a very big winner (or loser) in a very short amount of time.
Whether you should trade it or not, is what we are going to look at today.
What is the Non-farm Payroll? NFP Forex Meaning
Non-farm payroll or NFP is a report to gauge the economic health of the US by looking at the employment of non-farm, private household, military and not for profit organisations.
There are other important pieces of data that are released with the non-farm payroll report including the overall unemployment rate, detail on each sector, average hourly earnings and updates to previous releases.
What Currency Pairs are Most Affected by NFP?
Because the NFP is a US employment report, the major currency pairs affected by the release are all of the pairs that include the US Dollar.
These are pairs such as; EURUSD, GBPUSD, USDJPY and AUDUSD.
Increases in volatility can often be seen in other pairs and markets when the NFP report is released and is something you should keep in mind. With the world becoming a more connected place, larger shock waves are often felt in many places.
Why Should You Care About the Non-farm Payroll?
The boring reason is; the non-farm payroll gives traders the unemployment statistics of workers in construction, goods and manufacturing companies, and not farm or private household related work.
This report is shown each month through an overall unemployment rate and is crucial for a lot of economists.
Why should you really care? Really you should care because before the NFP is released the market can be as quiet as a church mouse, but often as soon as it is released it will explode into extreme volatility.
Non Farm Payroll Dates, Calendar and Forecast
Non-farm payrolls are nearly always (with a few exceptions) reported on the first Friday of the month.
These reports are released at 8:30 a.m US time, but you can track exactly when the next NFP is released by checking the bureau of labor statistics site .
Dailyfx and Forex Factory also have an up to the minute calendar where they track and release the NFP information and you can use the Dailyfx economic calendar to know when the next release is due.
Should You Trade the Non-farm Payroll – NFP?
First of all; I personally do not trade the Non-farm Payroll and I do not trade at all the day it is being released.
The main reasons for this is that the market is often incredibly slow leading into the announcement with price often not doing a whole heap. Then, when the announcement is released price can explode.
What will often surprise traders is that price will regularly not go in the expected direction come the release time. This is often because the announcement has already been factored into the current price and expectations, making it that much harder.
Price will also often spike in one direction before quickly snapping and breaking hard in the other effectively false breaking out a huge proportion of traders who were looking to play the breakout when the news occurs.
Look at the chart example from above that I have attached below again; you will note that price quickly breaks lower, before snapping hard back the other way stopping out all the traders who went short looking for a breakout.
I do not trade or follow the news, but I do know when the NFP is being released (nearly always the first Friday of the month) and I simply avoid it.
It fits in nicely because it is the end of the week and it is easy to just take the last day of the week off.
The are other reasons why even though on paper there are incredible moves taking place, it is not as easy to make trades and profits as what it may look.
When price is being so heavily traded and moving at such incredible speed, the spreads that you will be offered will blow out. You also have to be incredibly quick at either entering or closing out your trades to minimise a loss or maximise a gain.
Knowing when NOT to trade is just as, if not more important than knowing when to trade.
Knowing the best times to take a break and sit it out can save you both large losing trades and a lot of time.
If you are going to trade around the NFP be prepared for extreme volatility. Make sure you know exactly what your plan is going into the announcement and what you are going to do in all scenarios. You will not have time to mess about.
Please leave your comments and questions in comments section below;
Non-Farm Payroll Forex Strategy
TABLE OF CONTENTS:
How to trade effectively the Non Farm payroll ?
The Non Farm Payroll is the most significant data in the US , usually published the first Friday of each month , at 8:30 am EST , it is a major economic indicator that measures the employment situation on the USA . A strong non farm payroll number means a solid , growing and abundant economy. On the other side , a weak number is synonym of slowing economy . It is always compared with the previous month data (added or losing jobs except the farm industry ) between +10.000 et +250.000 . The FOMC based their monetary policies decisions on the results of NFP Reports . In the Forex market , the NFP is a great volatility maker , not only in forex markets but also in stocks and bonds . (see Non-farm payroll dates here)
In this article , we will project the lights on 2 trading NFP strategies , that works and provide best results .
The first one on the day of reports using 5 minutes daily chart and the Second one at the end of monday (next NFP) using the daily chart .
1 – Friday Trading Strategy (the NFP Release):
The rule :
At the opening of Market US Session , take a look at the first 8:30 bar , you should wait for the next bar going below the low of the 8:30 Bar , or above the high of 8:30 bar . this bar becomes our valid Bar . then you should place a sell stop 15 Pips above the high of this bar and 15 Pips below the low oh this bar , the trade must be executed the same day . Use always the Parabolic SAR or MACD to predict direction moves .
The figures below shows how it works :
The beauty of this strategy is that you have always on the other side a sell stop or buy stop , even if the price take the other side of the trade , you can close the position with the use of PSAR and MACD , and the other trade will be executed . This strategy gives best results in trending markets, and this is the case in NFP Release .
2 – End of Monday (following the NFP) Trading Strategy :
The Rules :
At the end of monday following the NFP , you take a monday high by looking at the daily chart , and Place a Buy Stop (15 Pips ) above and Sell Stop order below the monday low (15 Pips ) on tuesday US opening session. The trend takes usually for a week . This position must
be closed at the end of the week on Friday .
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