What Is the Non Farm Payroll and How Do You Trade It?
If you’re a trader, you already know the impact economic news can have on the forex market. One event that has a significant impact on the forex market is non-farm payrolls (NFP).
You may have seen headlines such as the “GBP/USD saw a drop after the NFP report”. Or, “major changes in the USD is expected during the NFP”.
But what exactly is the NFP, and how can you trade it?
In this guide, we are going to answer this question. So, make sure you stick around till the end.
At the end of this article, you will also find a solution to trade the NFP with a 100% Risk-Free trade.
What is NFP?
Every month on the first Friday, the U.S. Bureau of Labor Statistics publishes data on new job growth in the United States, as well as other labor market data. All paying jobs are included in the data, with the exception of government employees, private families, non-profit organizations, and the farming industry.
The NFP is a key indicator of how well the U.S. economy is doing. Investors pay close attention to this research because unusual and drastic changes in the published figures can cause significant price movements.
Currency pairs (particularly those involving the U.S. dollar) usually see large price movements in the minutes and hours following the data’s release, as it is one of the most anticipated economic news events of the month. This creates an excellent opportunity for traders with an excellent strategy to profit from the uncertainty.
NFP and forex: A perfect match
NFP data is significant because it is published on a monthly basis, making it an excellent predictor of the current state of the economy. The Bureau of Labor Statistics releases the results, and the next update can be found on an economic calendar.
The Federal Reserve Bank considers jobs to be a critical indicator. When unemployment is high, policymakers are more likely to pursue an expansionary monetary policy (with low interest rates). An expansionary monetary policy seeks to increase economic production and jobs.
As a result, if the unemployment rate is higher than average, the economy is considered to be underperforming, and policymakers will attempt to stimulate it. Lower interest rates and lower demand for the dollar are the results of a stimulatory monetary policy.
How do you read the NFP report?
There are three ways to analyze the NFP report:
- A higher payroll figure is beneficial to the U.S. economy. This is because more job creation contributes to more substantial and more stable economic development. People who have a job and an income are more likely to spend, resulting in growth. Therefore, foreign exchange traders and investors anticipate a monthly increase of at least 100,000 jobs. Any release above 100,000 claims will help to drive U.S. dollar gains. A release that is higher than the consensus estimate would have the same impact.
- Currency markets respond negatively to an anticipated shift in payroll figures. Forex traders who see an expected shift in the NFP report will look to other sub-components and items for guidance or insight. This includes the unemployment rate as well as manufacturing payroll. As a result, if the unemployment rate falls or manufacturing payrolls increase, currency traders would favor a stronger dollar, which is good for the U.S. economy. However, if the unemployment rate rises and manufacturing jobs fall, investors will abandon the U.S. dollar in place of other currencies.
- A lower payroll figure is unfavorable for the U.S. economy. A lower job image, like every other economic study, is bad for the world’s largest economy and the dollar. If the NFP report shows a loss of fewer than 100,000 jobs (or a lower-than-expected print), it’s a sign that the U.S. economy isn’t rising. As a result, forex traders would prefer higher-yielding currencies to the U.S. dollar.
Which currency pairs are most affected in the NFP?
Since the NFP data is a predictor of American employment, the data release has the greatest impact on currency pairs, including the U.S. Dollar (EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, and others). However, the ones that raise more eyebrows are EUR/USD and GBP/USD.
How do you trade a NFP report?
Here we’ll mention both EUR/USD and GBP/USD trading strategies:
- EUR/USD trading strategy
Since the EUR/USD is the most actively traded currency pair in the world, it usually has the smallest spread and the most price movement for making trades. During the NFP statement, there is no need to trade another pair.
Close all previous day trading positions at least 10 minutes before the data is expected to be published at 8:30 a.m. E.T. You do not take positions before the announcement for this strategy; rather, do nothing before the NFP numbers are issued.
When this happens, the price will experience a significant rise or fall that will usually last for a few minutes (sometimes more). We must wait during the initial transfer. The chart you must use for this strategy is 1-minute.
After 8:30 a.m. ET, the price can quickly rise or fall, usually by at least 30 pips or more in a matter of minutes. The larger the initial transfer, the better for day trading.
The first step tells us whether we should go long or short in our first trade. We would want to go long if the price moves more than 30 pips higher, but only if and when we get an actual trading setup, which will be addressed shortly.
If the price falls more than 30 pips in the few minutes following the 8:30 a.m. announcement, we will look to go short for our first trade if and when a trade setup arises.
There will be a pullback of at least 5 price bars after the initial step of 30 pips or more. This means that if the first move was upward, we want to see the price drop off the initial move’s high and remain below it for at least 5 bars.
Waiting for at least a 5-price-bar pullback allows you to draw a trend line across the highs of the price bars or across the lows of the price bars.
Take note that you’re drawing the trendline on the price bars that make up the pullback.
Since you are waiting for a pullback before entering a trade, calculate the difference between the final price and the high or low of the first transfer. This should be at least 30 pips, preferably more.
Now, divide the total by two. For instance, if the price moved 43 pips in the initial step, divide that by half to get 21.5 pips. This figure will be the number of pips you can position your profit target.
Since the EUR/USD will not behave exactly the same after each NFP report, it will take some practice to be able to spot these trade setups and be fast enough to jump in and trade them.
- GBP/USD trading strategy
This strategy can be used on 5-minute or 15-minute charts. During the first bar following the NFP report, nothing is traded.
The bar produced from 8:30 to 8:45 will be large. After the first bar, you must wait for an inside bar to occur. It does not need to be the next bar. In other words, you are waiting for the most recent bar’s range to fall entirely within the previous bar’s range.
The previous bar completely covered the price range of the inside bar. When this last bar closes higher or lower than the inside bar, you can enter the trade.
The high and low rate of this inside bar establishes our possible trade triggers. You must enter a trade in the direction of the breakout if a subsequent bar closes above or below the inside bar.
You may also enter a trade as soon as the bar moves past the high or low without having to wait for it to close. Stick to the approach you’ve chosen. You can set a stop loss of 30 pip on the trade you joined.
You can only make two trades at a time. Don’t re-enter if both are stopped out. If necessary, the inside bar’s high and low are used again for a second trade.
The aim is to complete the task in a specific amount of time. In most cases, the majority of the relocation takes less than four hours. As a result, traders leave four hours after they enter. If you want to stay in the trade, you can use a trailing stop.
The Pros of Trading the NFP
The non-farm payroll report usually triggers one of the most significant rate fluctuations of any news release in the forex market. As a result, many analysts, traders, funds, investors, and speculators are looking forward to the NFP report and the directional movement it will cause.
With so many different parties watching and analyzing this study, even though the number is in line with expectations, it can trigger significant rate swings. And you will profit from it.
The Cons of Trading the NFP
It may surprise you to learn that the recording of NFP figures is actually flawed. The government calculates the NFP by subtracting the number of employment losses from the number of job gains. It is far from exact and is updated not once but twice before it is finalized. As a result, the first statistic you hear is often inaccurate.
Furthermore, the margin of error is often greater than the actual amount. The NFP estimate in the headline is affected by such a broad margin of error at any given moment, on any given release, that it is nearly meaningless without context.
Things to look out for when trading the NFP
There are some important things to look out for when trading the NFP, these include:
- Whipsaws
Whipsaw occurs when the market jumps in one direction for a few seconds before suddenly reversing and continuing in the opposite direction.
This can happen for a number of reasons, including the news misreporting the headline, traders guessing before the announcement, and the market learning of a significant revision from the previous month, which sometimes takes a few seconds longer to get since the headline is published first.
- Spreads
During periods of high volatility, such as the release of the NFP, the market is either very thin or has a surplus of orders that must be processed. In either case, the BID/ASK spread will increase, often by as much as 25 pips.
- Slippage
The Non-Farm Payrolls report has the potential to generate a volatile market with high trading volumes. Slippage is possible in such market conditions. Slippage is the time it takes between placing your order and getting it filled. This method usually takes less than a second. However, after the NFP, it could take 5 or 10 seconds, and the price could have changed many pips in that time.
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