Every first Friday of the month is an essential day in the financial markets because the United States Bureau of Labor Statistics (BLS) releases the previous month’s non-farm payroll (NFP).
However, new forex traders find it hard to read, understand, and incorporate non-farm payroll report data into their trading strategies. Luckily, this post analyses the essential data in the non-farm payrolls report and how traders can utilise them in the NFP Trading Strategy.
What is the NFP?
It is valuable economic information used to measure the number of new job additions during the previous month. The report includes non-agricultural jobs within the US; it excludes private household employees, government employees, farm employees, and employees of nonprofit organizations. Simply put, the NFP is an economic indicator of American employment.
Why the NFP Matters to Traders
All experienced currency traders, futures traders, stock traders, and top option market traders wait and analyse the NFP data keenly. NFP release affects all asset classes, including stocks and currencies, according to Investopedia.
The movement of the US dollar impacts other global assets because the United States has the most important and largest economy worldwide. The economic policy decisions set by the United States Federal Reserve can make the payroll data considerably vary from one month to the other.
Changes in the market participants view can initiate volatility in the financial markets. In this case, volatility leads to better profit potential and more trading prospects. Due to this, traders need to incorporate good NFP trading strategies that exploit the initial volatility to enjoy an outstanding profit potential.
How to Trade Using the NFP Data
A high figure in the NFP economic data release indicates the US economy is in a good position. Therefore, the US dollar and stocks stand to benefit. On the contrary, a low reading displays a negative economy in the country.
Nonetheless, the unexpected happens where the market fails to follow the policy makers projections. Traders need to consider other factors, such as market expectations and unanticipated uncertainties.
A general NFP report also measures the monthly change of the following:
- Private payrolls
- Unemployment rate
- Average workweek
- Average hourly earnings
- Participation rate
A few days before the actual release of the NFP figures, traders can get a forecast of what to expect from headline news events.
Should the NFP figures be higher than the expectations, it depicts a strong economy, leading to higher-yielding currencies, especially the dollar. On the other hand, a figure below the forecast shows a weak economy that hurts the dollar.
The market adjusts its price based on the actual news release of the NFP data. So, a huge NFP miss translates to a big market spike. Whether the real NFP numbers are below, above, or conforms to the market expectation, the market adjusts price movements based on that data.
NFP Trading Strategies
With countless investors from all walks of life watching the release of NFP figures, any non-farm employment change results in a price change, either up or down, based on how close the real number is to the forecasts made before the news release. This makes non-farm payrolls popular trading essentials for indices and forex traders searching for a potential profit from their investments.
Several trading techniques exist to assist investors in trading the NFP data. Here are some of the most widely used strategies:
Trade Before the Release of NFP Report
In this NFP simple strategy, traders utilise the breakout strategies because the objective is to scalp the currency markets for a quick profit target. Non-farm payroll data is an incredible volatility source that causes significant price swings. For the traders who oppose NFP trading economics, the ideal way to embark on NFPs is to take a keen look at the price action.
Traders who want to use charts for Trading Day NFPs need to follow these step rules:
- Fifteen minutes prior to the release of NFP economic output data, mark the lows and highs of the last four-hour trading period on the charts.
- Place sell order below the range’s low and a buy order above the range’s high.
- For the two orders, place a secure stop-loss order on the opposite side of the range.
- Wait for NFP’s initial reaction to trigger one of the orders.
- After getting an open position size, cancel the pending order.
- Use target price to determine the take profit.
Trading the Fade
When it comes to this trading technique, traders must initiate trades in the opposite direction of the original release reaction. The key levels of this strategy are to plan with steps, wait for the initial signal, and then place trades based on the outcomes.
Depending on the actual data release, entry price and price target, traders can overreact, enter or leave trades, which results in intense activity. Once the market stabilises, traders can assess their position size and decide to reduce the losses or take the profits. This activity creates a perfect short-term trading opening for traders.
Swing NFP Trading Strategy
NFP is a perfect trading strategy for long-term trends. Often, the unemployment numbers affect long-term trends, and the price movement follows the direction defined by non-farm payroll. The release of this data shows traders whether the month will be bearish or bullish. Swing is a simple strategy that traders can use alongside their custom strategies. All in all, traders should be watchful of false signals.
Currency Pairs Affected by NFP
NFP data affects all major currency pairs that contain the US dollar as a counter currency or base currency. Some of these currency pairs include EUR/USD, USD/CAD, GBP/USD and USD/JPY. Traders must adjust profit targets and stop losses accordingly and calculate the average volatility of the earlier NFP releases before initiating a trade.
For example, a major mistake is to use the same stop loss for GBP/USD and USD/CAD. Still, following the NFP report release, the major currency pairs described above are the best to trade.
Assets Affected by NFP
The US Dollar
The NFP report affects the US dollar most. Whenever it’s trending positively, traders can anticipate the dollar to display bullish behaviour.
The NFP effect on the price of gold stems s from the dollar impact. A high NFP supports the price of gold, provided physical or industrial demand exists within the economy.
The NFP affects individual stocks, and that impact is mainly felt in the indices. A robust non-farm payroll figure pinpoints vital turning points and trends in bear markets. A weakening NFP, on the other hand, particularly on low wages, shows changes in the bull market conditions.
As an economic indicator, the NFP impacts the demand for oil, gas and energy. A positive report leads to high energy use in homes, industries, work and travels. However, it’s tricky for NFP to determine the direction of oil price appropriately on its own.
Experts’ Final Say
The NFP is undeniably a vital monthly report for forex traders regardless of their skill levels. It is also one of the trickiest sets of data to use when trading. While it contains a short-term effect on the price and market movements, its benefits come from the long-term analysis. The wage inflation trend, job growth trend, and unemployment trend are by far more valuable than other month’s data.
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Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.
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