• Mon. May 20th, 2024

How to Trade the Non-Farm Payroll Report

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If you have an interest in trading forex using fundamental analysis, one of the top recommendations you will see for beginners is to trade the non-farm payroll (NFP) report.

What is the NFP report, why should you consider trading it, and how do you go about it? In this post, we will go over the basics, and give you some cautions as well.

What is the Non-Farm Payroll Report?

The non-farm payroll report is pretty well-described by its name, but not in a way that is particularly intuitive.

It is actually the US un/employment report, but specifically for employees who are not on payrolls at farms (see, it is quite literally the non-farm payroll report).

When we consider how healthy the economy of any particular country is, one of the top things we are going to pay attention to is jobs. So, it follows that the NFP report is a big deal.

When Does the Non-Farm Payroll Report Come Out?

The NFP report has an incredibly predictable and straightforward schedule. You can expect it at 8:30 AM EST/EDT on the first Friday of each month.

What Happens in the Forex Markets When the NFP Data is Released?

When the non-farm payroll report comes out, expect the forex markets to react in a big way.

You can see huge surges upward or downward in currency prices immediately after a report releases, often with a lot of slippage.

Do Not Oversimplify the Impact of the Non-Farm Payroll Report

You might think that trading the NFP report is as simple as this:

  • If a bunch of jobs were added, great! The value of the country’s currency should increase.
  • If a bunch of jobs were lost, then the currency value should fall.

But things are not that simple.

Much of the movement (or lack of movement, as is the case at times) that happens in the forex markets in response to the NFP report has to do with expectations versus reality.

Here, there are a few distinct possibilities:

  • What the NFP report shows is close to what people were on the whole projecting it was going to say (in short, there are no surprises).
  • What the report shows is better than what people were expecting. More jobs were added than was expected.
  • What the report shows is worse than what people were expecting. Fewer jobs were added than was expected, or more jobs were lost than was projected.

In order, here is how we would expect the markets to react to all three scenarios above:

  • NFP as expected: This is a situation where you might not see a ton of movement when the report comes out. Even if the report shows a healthy economy, traders on the whole are often going to shrug and move on with their days.
  • NFP better than expected: In this scenario, you might see a sharp rise in US currency value.
  • NFP worse than expected: You could see a sharp fall in currency value.

Another possible scenario is the NFP report outperforming expectations, but doing so in such a dramatic fashion that people respond not with enthusiasm, but with concern. They may fear that inflation is on its way.

An Example of How NFP Trading Works

Here is one way you could trade the non-farm payroll report:

1. Get your trading platform ready to go, and wait for the release of the report.

2. Do not immediately enter! Watch the initial candle open and close on the 15-minute chart.

2. After the initial candle is done forming, watch the next ones form. When you spot an inside candle that is fully engulfed by the one prior, it means that the market is consolidating, and a breakout may be imminent.

3. Continue watching candles form. When you see one close outside the range of the inside candle, it means that price may be moving in that direction.

4. If the candle closed above the inside candle, then enter long. If the candle closed below the inside candle, then enter short.

Hopefully, price will continue in the direction you entered in, and you can collect some profits before you close your trade. Make sure you have a tested rule for exiting.

The reason we suggest that you do not enter the market on the first candle is because often, that candle is just noise, and not indicative of which way the market will break.

By waiting for the next candle to form, you avoid getting caught up in a volatile whipsaw (at least some of the time).

The strategy we shared above involves acting based on what you see price doing on the chart, but some people simply approach the matter based entirely on how the reports compare to expectations.

You can also use a combined approach. Say, for example, that the report exceeds expectations, and you expect EUR/USD to fall. You could wait for the initial candle to finish forming, then the inside candle, and then set up a sell order based on your own expectations, and wait for price to break downward.

Should You Trade Before the Report or During It?

While the technique above can help you avoid whipsaws, the potential downside is that sometimes, the biggest profitable market moves can happen right away when the report is missed. So, by holding back, you might miss it.

This is why some traders actually set up their trades prior to the release of the NFP report, rather than after it. They simply choose to take the risk of dealing with whipsaws so they can get in on the initial price break.

As they do not know whether price will move up or down (having not seen the report), they will set up both a long order and a short order, and then cancel whichever one does not get triggered.

Is it better to trade before the report or wait until after? There is really no single “best” approach for everyone. It comes down to what you are comfortable with and what gives you the best results. That is something you can figure out through backtesting and demo testing.

Should You Trade the NFP Report At All?

One more consideration about trading the non-farm payroll report is that it may or may not be a fit for your trading personality.

Some people simply like to avoid trading fundamentals. Hypothetically, trading the NFP report is pretty simple. But trying to make accurate predictions about how human beings will react en masse to economic news can be harder than you might think. There are just so many factors at play at any given time.

If you find trading the NFP report intuitive and profitable, then go for it. But if you do not want to deal with fundamentals, then you can look for a different way to trade.

That raises another question. If you are trading using technical analysis or price action alone and you know an NFP report is coming out soon, what, if anything, should you do about it?

You have two options, if you are not trading the report:

  • Avoid trading when the report releases.
  • Ignore the report entirely and trade as usual.

If you avoid trading altogether during the report release, you can steer clear of whipsaws the report might generate.

What is the logic behind the other option, where you ignore the report and trade as if it doesn’t exist?

Well, the thinking is that if you have a reliable enough trading method, it should steer you around whipsaws reasonably well on its own. So, it might simply tell you not to trade at that time anyway.

Again, there is no single “best” approach. Whether you trade the NFP report, avoid the NFP report, or ignore the NFP report, all that matters is that you choose an approach that tests and trades profitably.

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