Trading the Non-Farm Payroll (NFP) Report

The Non-farm Payroll report is one of America’s most important economic announcements. The day of the release can be a major source of trading opportunities. It’s usually released on the first Friday of every month at 8:30 AM New York time.

The report reveals how many people are currently working in US manufacturing, construction, and goods industries. This data is significant because these jobs represent 80% of the USA’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 is the NFP Important For Traders?

The Non-farm Payroll report is one of the most important news releases each month. The NFP is important for traders because it is the catalyst for higher volatility. A volatile market is a major source of trading opportunities and bigger profits. At the same time, it can also cause large losses because it does add risk.

These jobs figures say a lot about the health of the economy. Particularly if the number is much higher or lower than the expected figure. This scenario can have a big and sudden impact on financial markets and the FX currency market. These extreme shifts in currency value mean good opportunities to trade, but as we mentioned before, volatility also amplifies risk.

Which Currency Pairs Should I Trade?

The major currency pairs like the EUR/USD, GBP/USD, AUD/USD or USD/JPY are favorites to trade during the NFP news release. The major currency pairs often move as traders buy or sell the USD based on how well the US economy is doing.

Investors will also buy and sell shares based on expected future growth, so the major stock indices tend to move swiftly.

Commodities which are tethered to the USD will also change value and create trading opportunities. A good example of this is gold. Gold is seen by investors as a safe haven in times when the USD is expected to drop. So, depending on the jobs numbers and how confident investors are in the economy, the gold price can also see significant volatility.

It should be clear by now that trading opportunities surrounding the release of the NFP are not limited to the FX markets. An experienced trader should do 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. Unless you are a scalper, you may even want to wait for the markets to calm down a little before you take a position.

I would also suggest avoiding the cross-currency pairs such as EUR/JPY, EUR/AUD, GBP/JPY, etc.. The cross currency pairs tend to produce large whipsaws (quickly reversing pivots) and are less predictable in comparison with the major currency pairs.

Tips and Tricks Trading the NFP Report

A lot of professional traders choose not to trade during the NFP news release because of the risk associated with the increased volatility. If you are comfortable with participating in a market during high-impact news announcements, there are a 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 one of two things. Either the NFP figures miss the market expectation or either the NFP figures are exceptionally higher than market expectation.

Should the NFP figures miss the market, this will have a negative impact on the USD value and would create a good shorting opportunity of USD pairs. On the flip side, if the figures are better than expected, there will be a good opportunity to open a long position.

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. But, the figures came in very low and only 38k new jobs were added during the previous month. The market sold the USD heavily, which meant the dollar crosses like the EUR/USD rallied (see Figure 1).).


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 once it is released.

To do this you have to endure some slippage, which can’t be overcome because of the nature of the market to exhibit large movements in such circumstance. Under no circumstance, can a trader fade this move (trade in a contrarian way) 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 to trade is when there is no major change in the payroll figures. In this scenario, it’s always best to fade the first move as the first move is likely a stop hunt before the real move begins.

Let’s take another example of the Non-farm payroll figures from May 6th, 2016 when the NFP figures missed market expectations and come in lower at 160k from previous 203k jobs.

In Figure 2 we can see that the initial reaction was as expected. A bad NFP figure means a lower dollar thus a higher EUR/USD. But it is not always about the numbers. It is best to put some context around the NFP figures and add that to the technical picture.

In this case, the prevailing EUR/USD trend was down. As predicted, the first move was a fake-out and we ended up with a big whipsaw.


Figure 2: EUR/USD 1H Chart

These are not set in stone rules. They are just guidance and as you gain experience you’ll become more proficient in analyzing price action in the NFP release.
Above all, remember that trading during the NFP report carries an increased risk due to the high volatility. As such it’s wise to adjust your position size in such an environment.
The Non-Farm Payroll (NFP) Report is available at US Bureau of labour statistics.