Trading the Non-Farm Payroll (NFP) Report

The Non-farm Payrolls is one of America’s most important economic announcements and potentially a major source of trading opportunities. It’s normally released on the first Friday of every month at 8:30 AM New York time. It reveals how many people are currently working in US manufacturing, construction and goods industries which represent 80% of the country’s total workforce.

The NFP report doesn’t include the farm workers, government employees, private household staff and anyone working for a non-profit organization.

Why NFP is important for Traders?

The Non-farm Payroll report is one of the most important event risk and volatile market news releases each month. From a trader’s perspective the NFP is important because is the catalyst for higher volatility, which is a major source of trading opportunities, bigger profits, but at the same time, it can also cause large losses.

The jobs figures also say a lot about the health of the economy, particularly if the number is much higher or lower than the expected figure. This can have a big and sudden impact on financial markets and in particular on the FX currency market, which means an opportunity to trade but as we mentioned before, volatility also amplifies risk.

Which Currency to Trade

The major currency pairs like the EUR/USD, GBP/USD, AUD/USD or USD/JPY are favored to be traded during the NFP news release. The major currency pairs often move as traders buy or sell the US Dollar based on how well the US economy is doing. Similarly, investors will buy and sell shares based on expected future growth, so major stock indices also tend to move quickly. Then, there is the precious metal Gold, the so-called safe haven. Depending on the jobs numbers, and how confident investors are about the economy Gold can also see a lot of volatility. As you have just learned the NFP Report can be the source of major market disruptions across every global market, not just the Fx market. In this regard, you have to do your own research to find the best trading opportunities but always proceed with caution.

While volatility creates opportunities to profit, it could just as easily lead to losses so when trading the NFP always consider using stop-losses to manage your risk and you may even want to wait for the markets to calm down a little before you take a position.

You also may want to avoid trading the cross currency pairs such as EUR/JPY, EUR/AUD, GBP/JPY, etc. as they tend to produce large whipsaws and are less predictable in comparison with the major currency pairs.

Tips and Tricks Trading the NFP Report

Before going any further you have to keep in mind that a lot of professional traders choose not to trade during the NFP news release because of the risk associated with increased volatility. However, if you do feel comfortable to participate in the market during a high-impact news announcement, it’s worth to keep in mind few tricks that will give you an advantage.

The most important thing you have to keep in mind is that the most severe and exacerbate one side movement will always come as a result of either the NFP figures missing the market expectation (negative for the US Dollar) or either the NFP figures comes exceptionally higher than market expectation (positive for the US Dollar).

Let’s take for example the Non-farm payroll figures from June 3rd 2016, which had an unexpected big miss. The general consensus was for the market to add 159k new jobs in May.  However, the figures came in very low and only 38k new jobs were added during the previous month. The market reaction was pretty much straight forward as the US Dollar was sold quite heavily, which means the dollar crosses like the EUR/USD rallied (see Figure 1).

nfp-eur-usd

Figure 1: EUR/USD 5-Minute Chart

 

If you’re not already positioned long before the NFP release the best way to catch this trade is to enter the market as soon as possible, but you have to endure some slippage, which can be easily overcome because of the nature of the market to exhibit large movements in such circumstance. Under no circumstance, you can’t fade this move as you always want to trade in the direction of the first reaction.

This is by far the most favorable and the most profitable NFP scenario that you can have. The second best NFP scenario, one can trade is when there is no major change in the payroll figures and in this scenario, it’s always best to fade the first move because usually the first move can be a stop hunt before the real move begins.

Let’s take for example the Non-farm payroll figures from May 6th 2016 when the NFP figures missed market expectation and come lower at 160k from previous 203k jobs. In Figure 2 we can clearly see that the initial reaction was as expected bad NFP figure means lower the dollar, thus higher the EUR/USD but as we mentioned before is not always about the numbers as you need to contextualize the NFP figures into the technical picture. The prevailing EUR/USD trend was down and as expected the first move was a fake-out and we ended up with a big whipsaw.

nfp-eur-usd-downtrend

Figure 2: EUR/USD 1H Chart

These are not set in stone rules, but they are more for guidance and as you’ll gain more experience you’ll become more proficient in reading the specific price action into the NFP release. Above all, you have to keep in mind that trading during the NFP report carries a higher risk and us such it’s wise to adjust your position size to such an environment.

The Non-Farm Payroll (NFP) Report is available at US Bureau of labour statistics