How To Trade The Non Farm Payroll Release

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NFP and Forex: What is NFP and How to Trade It?

NFP and Forex Trading: MAIN TALKING POINTS

  • Non-Farm Payrolls (NFP) releases create volatility in the forex market .
  • NFP measures net changes in employment jobs.
  • Forex traders use an economic calendar to prepare for NFP releases.

What is the NFP ?

The non-farm payroll (NFP) figure is a key economic indicator for the United States economy. It represents the number of jobs added, excluding farm employees, government employees, private household employees and employees of nonprofit organizations.

NFP releases generally cause large movements in the forex market . The NFP data is normally released on the first Friday of every month at 8:30 AM ET. This article will explain the role NFPs play in economics and how to apply NFP release data to a forex trading strategy.

How does the NFP affect forex?

NFP data is important because it is released monthly, making it a very good indicator of the current state of the economy. The data is released by the Bureau of Labor Statistics and the next release can be found on an economic calendar .

Employment is a very important indicator to the Federal Reserve Bank. When unemployment is high, policy makers tend to have an expansionary monetary policy (stimulatory, with low interest rates). The goal of an expansionary monetary policy is to increase economic output and increase employment.

So, if the unemployment rate is higher than usual, the economy is thought to be running below its potential and policy makers will try to stimulate it. A stimulatory monetary policy entails lower interest rates and reduces demand for the Dollar (money flows out of a low yielding currency). To learn exactly how this works, see our article on how interest rates effect forex .

The chart below shows how volatile forex can be after an NFP release. The expected NFP results for March 8, 2020 were 180k (job additions), the actual result disappointed with only 20k jobs being added. As a result, the Dollar Index (DXY) depreciated in value and volatility increased.

Forex traders must be wary of data releases like the NFP. Traders could get stopped-out due to the sudden increase in volatility. When volatility increases, spreads do too, and increased spreads can lead to margin calls .

Which currency pairs are most affected by NFP

The NFP data is an indicator of American employment, so your currency pairs that include the US Dollar ( EUR/USD , USD/JPY , GBP/USD , AUD/USD , USD/CHF and others) are most affected by the data release.

Other currency pairs also display an increase in volatility when the NFP releases, and traders must be aware of this as well, because they may get stopped out. The chart below shows the CAD/JPY during the NFP data release. As you can see, the increase in volatility could stop a trader out of their position even though they are not trading a currency pair linked to the US Dollar.

Non-farm payroll release dates

The Bureau of Labor statistics normally releases the NFP data on the first Friday of each month at 8:30 AM ET. The release dates can be found on the Bureau of Labor Statistic’s website .

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Due to the volatile nature of the NFP release, we recommend using a pull-back strategy rather than a breakout strategy. Using a pullback strategy, t raders should wait for the currency pair to retrace before entering a trade.

Using the same example as above (NFP results 20k vs 180k expected) we expect the US Dollar to depreciate. In the example below, we use the EUR/USD . Because the NFP data came out worse than expected, we forecast the EUR/USD to appreciate.

Trading News: How to Make Money on Non-Farm Payrolls?

What are the Non-FarmPayrolls and what to trade them for?

Non-Farm Payrolls (NFP) are essential data on employment in the USA, which shows changes in the number of employees out of the agricultural sector of the country during the last month. The indicator is based on a poll answered by some 400,000 companies and 50,000 households. Empirically, it has been figured out that if the NFP increases stably by +200,000 every month, the GDP surplus equals roughly 3%.

The NFP data is published on the first Friday of every month simultaneously with one more important indicator, which is the Unemployment Rate. The latter shows the percentage of the unemployed who are in an active search of a job, in the overall number of the labor force in the USA.

So, why are the NFP interesting for a trader?

The answer is simple: as long as this is some very important data on the US economy, the reaction of the market on it might be significant, large-scale price movements might emerge, which can be used for trading.

Non-Farm Payrolls are a rather volatile indicator, and, depending on how much the real data differs from the forecast, it can move the market this or that way by a hundred points. If the index is much better than expected, the dollar is likely to grow robustly; if the NFP turns out much worse than expected, the USD is likely to fall.

The increased volatility of the NFP provides good opportunities for trading. If the trader manages to prepare a good trading strategy and enter the trade well, they can rather quickly (in one or two hours) make a serious profit.

For example: on June 5th, 2020, the NFP data turned out to be much better than forecast — instead of the expected +160,000, the surplus amounted to +224,000. The dollar reacted by significant growth, gold (XAU/USD) declined by more than 200 points ($20) in two hours.

Three steps of trading the NFP

Choosing the time for a trade

For this, we will need the economic calendar, in which we will find the date and time of the NFP publication. Let us take the NFP and the Unemployment Rate index in the US for Friday, October 4th, 2020. We look at the calendar and see that the publication of the news is planned for 3:30 p.m. Moscow time. By this moment, we need to carry out tech analysis and draft a trading plan.

Preparing a trading plan

To prepare a trading plan, you should analyze the price chart and decide the place and time of the trade. Here, tech analysis will be of great help as it will point at the closest strong support/resistance levels, price patterns, or graphic patterns that we can be guided by.

The tech analysis will allow us to find a perfect entrance to the market and show us the perspectives of future price movements. A complete trading plan gives us clear criteria for entering the market if we comply with all necessary conditions.

I prepared a trading plan for gold, XAU/USD. The long-term trend is an uptrend, in the short term, there is a descending correction; I found no formed price charts on H1 but drew the important support and resistance levels.

An hour before the publication of the NFP gold was trading near the upper border of a small price channel between the support level at $1505.00 and the resistance level at $1510.00. I decided that after the publication I would trade a confident breakaway or a false breakaway of the borders of this channel.

Trading the plan

Right before the publication of the data, we go to the minimal timeframe M1 and watch closely the price movements at the levels specified in the plan. In our example, right after the publication of the news at 3:30 p.m., gold jumped above the resistance line at $1510.00, setting the new local minimum at $1515.60. However, it failed to stay there: the bears grasped at the wheel and closed the minute below $1510.00, demonstrating a false breakaway.

I opened my selling position based on the false breakaway of $1510.00 at the price of $1508.00; the Stop Loss was 50 points on $1513.00. Ideally, the SL should have been put behind the local maximum at $1515.60, but the SL to Take Profit ratio should also be taken into account: it must be no less than 1:1, better 1:2.

As the first goal for locking in profit, I chose the neat support level $1500.00; if it were broken away, I would hold the position till the price reached the next support levels. In the end, the XAU/USD quotations went downwards, and my position was closed at $1501.00 with a profit of +70 points.

It is worth noting that the position was opened based on technical indicators only, the news was not taken into account. The published data may be analyzed later when the trade is already open to evaluate the perspectives of further development and make a final decision about whether to lock in profit as quickly as possible or keep holding the position.

In our example, the NFP numbers turned out to be worse than forecast: +136,00 against +162,000. At the same time, the previous data was revised and increased, and the Unemployment Rate was decreased to 3.5% against the forecast of 3.7%. As a result, the dollar stopped falling rather soon and was swift to resume its growth, however, the controversy of the data restrained the movement.

Summary

Trading the news is risky as it may bring profit as well as losses equally fast, so the trader should make as balanced a decision as possible before venturing at it. In the case of the Non-Farm Payrolls, I recommend short-term intraday trading because if we leave the data for the weekend (Saturday and Sunday), the situation may change dramatically.

Forex Strategy for Day Trading the Non-Farm Payrolls (NFP) Report

Here is a strategy for day trading the EUR/USD forex pair when the non-farm payrolls data is released on the first Friday of every month. The strategy includes what to do prior to the release, how to enter a position and in which direction, how to control risk and when to take profits. It also addresses position size (how big or small of a position you take) as this is part of risk management.

The non-farm payrolls report is one of the most-anticipated economic news reports in the forex market. It is published the first Friday of the month at 8:30 AM Eastern time by the U.S. Bureau of Labor Statistics. The data release actually includes a number of statistics, and not just the NFP (which is the change in the number employees in the country, not including farm, government, private and non-profit employees). Another metric included in the data release is the ​unemployment rate.

As one of the most-anticipated economic news events of the month, currency pairs (especially those involving the US dollar) typically see big price movements in the minutes and hours after the data is released. This makes it a great opportunity for day traders with a sound strategy to take advantage of the volatility. Below is a step-by-step forex strategy for trading the NFP report.

Trade the EUR/USD After the NFP Report

The EUR/USD is the most heavily traded currency pair in the world, and therefore it typically provides the smallest spread and ample price movement for making trades. There is little reason to day trade another pair during the NFP report.

Close all prior day trading positions at least 10 minutes prior to 8:30 AM ET when the data is scheduled to be released. For this strategy we DO NOT take positions before the announcement, rather we do nothing until the NFP numbers are released. When that occurs the price will see a big rise or decline which typically lasts for a few minutes (sometimes more). During that initial move we do nothing, we just wait.

For this strategy, use a 1-minute EUR/USD chart.

Initial Move Establishes First Trade Direction

Just after 8:30 AM ET the price will rise or fall rapidly, typically at least 30 pips or more within a couple of minutes. The bigger this initial move the better for day trading purposes.

The initial move gives us the trade direction (long or short) for our first trade. If the price moves more than 30 pips higher, we will want to go long. but only IF and WHEN we get a valid trade setup, which is discussed shortly.

If the price drops more than 30 pips, in the few minutes after the 8:30 AM release, then we will be looking to go short for our first trade. when and if a trade setup occurs.

In figure 1 (click for larger version) the price moves aggressively higher in the few minutes after 8:30 AM. That means we will be looking to buy when a trade setup occurs. The times on the chart are GMT, not ET. Therefore, 15:30 is when the news was released on the attached charts.

Wait for This Trade Setup

The initial rise or fall in the moments after 8:30 AM lets us know in which direction we will be trading. The next step is to wait for a trade setup. A trade setup is a sequence of events that must unfold in order for us to get into a trade. Since there is often a lot of volatility surrounding the news, we will look at a few variations of the setup, as no two days are ever exactly alike.

Here is what we are waiting for:

  • After the initial move of 30 pips or more, there must be a pullback of at least 5 one-minute price bars. This means that if the initial move was up, we want to see the price drop off the high of the initial move and stay below that for at least 5 bars (they don’t all need to be down bars). Preferably the pullback makes significant downward progress, but it must not drop below the 8:30 AM price where the initial move began. If the initial move was down, we want to see the price rally off the low of the initial move and stay above low that for at least 5 bars. Preferably the pullback makes significant upward progress, but it must not rise above the 8:30 AM price where the initial down move began.
  • By waiting for at least a 5-price-bar pullback you can draw a trend line across the highs of the price bars (if the initial move was up) or across the lows of the price bars (if the initial move was down). Note: you are drawing the trendline on the price bars that compose the pullback.
  • If the initial move was up, buy when the bid price breaks above the trendline. If the initial move was down, enter a short trade when the bid price moves below the trendline.

This is the simplest form of the strategy and is useful in most situations. Unfortunately, it is quite general, so occasionally the pullback may not provide a trendline that is useful for signaling an entry. In such cases, the alternative entry discussed in the next section may be helpful.

  • If a long trade is taken, place a stop loss one pip below the recent low that just formed prior to entry.
  • If a short trade is taken, place a stop loss one pip (plus the size of your spread) above the recent high that formed prior to entry.

Figure 2 (click for larger version) shows the strategy at work. The initial move was up, so we want a long trade. There is a pullback that lasts at least 5 bars, and the trendline is drawn along the price bar highs that compose the pullback. The price then breaks above the trendline signaling a buy. A stop-loss is placed one pip below the low of the pullback that just formed.

Alternative Trade Setup(s)

After the initial move, if the price pulls back more than half of the distance of the initial move (before breaking the pullback trend line and signaling an entry) then this alternative method can be used.

  • Once the price has pulled back more than 50% (can use a Fibonacci retracement tool), wait for the price to consolidate for at least two price bars. That means the price moves sideways for at least two minutes. Draw a line along the high and low prices of those two price bars once the second bar completes and the third bar is starting to form.
  • If the initial move was up, buy if the bid price moves above the high of the consolidation (the line you just drew). If the initial move was down, enter a short trade if the bid price drops below the low of the consolidation.
  • If a long trade triggers, place a stop loss one pip below the low of the consolidation.
  • If a short trade triggers, place a stop loss one pip (plus the size of your spread) above the high of the consolidation.

Figure 3 (click for larger image) shows an example of this strategy. The price rallies so we are looking for a long trade. The price pulls back and consolidates, but then it drops instead of rallying above the consolidation. In this case, there is no trade, because the price does not move above the high of the high of consolidation. As long as the price stays above where the initial move began we can continue to look for long trades.

In figure 3 the price doesn’t stay above where the initial move began. This sets up another alternative trade. If the price moves at least 15 pips past where the initial move began, we can look for a trade in this new direction, following a pullback. In figure 3 the price initially rallies but then collapses and moves more than 15 pips below where the initial move started. This big drop means we are now looking for short trades. When the price starts to ​pull back, look for either of the entry signals outlined in this section or the one above.

The price target has also been included in figure 3. How to establish the price target is discussed next.

Establishing a Profit Target

Because of the volatility surrounding the news announcement, how far the price moves from the 8:30 price can vary dramatically from one NFP day to the next. Sometimes it only moves 50 pips within a couple hours, other times it moves 300 pips or more in an hour or two.

That said, the initial move is all we have to give us some idea of how volatile the EURUSD is in response to this NFP report.

Since we are waiting for a pullback before taking a trade, once that pullback starts to occur, measure the distance between the 8:30 price and the high or low of the initial move (if the price starts jumping at 8:29 in the same direction, include that). This should be at least 30 pips or more.

Now, cut that number in half. For example, if the price moved 43 pips in the initial move, cut that in half and you are left with 21.5 pips. That latter number is how many pips away you will place your target (an offsetting order to exit the trade at a profit) from your entry price.

Figure 4 (click to see larger version) shows one of the same trades we looked at prior. In this case, the size of the initial move is 115 pips. Cut in half, our “profit target” is 57.5 pips.

Figure 3 also shows an example of the profit target method. In that case, the initial move was 56 pips, so cut in half, you are placing a profit target 28 pips away from the entry.

The Risk/Reward and Position Size

Before any trade occurs you know your entry price. because you know the high or low of the consolidation or the price where the trendline will be broken. Note that since trendlines are sloping the breakout price will change every bar.

You also know your stop loss location because you know where the recent high/low was prior to your entry. You also know your profit target because the initial move has already happened.

The difference between your stop loss and entry is your ‘trade risk’ in pips. The difference between your profit target and the entry point is your ‘profit potential’ in pips.

Only take a trade if your profit potential is at least 1.5x your trade risk. Ideally, it should be 2x or more. In the examples above the profit potential is about 3x the trade risk.

Position size is also very important. Only risk 1% of your capital on a trade. That means your trade risk, multiplied by how many lots you buy, shouldn’t be more than 1/100 of your account. For example, if you have $5,000 account, you can risk up to $50 per trade (1% of $5,000). If the trade risk is 20 pips, then your position size should be no larger than 2.5 mini lots (that means taking a trade worth $25,000, which will require leverage). With a 2.5 mini lot position, if you lose 20 pips you will lose $50. If your position size is bigger than that, you will lose more than $50, which isn’t advised for this account size.

How to Determine Proper Position provides more example of how to calculate the perfect position size.

ADAPT the Method, Don’t Copy It

The method described above is a guideline. It is impossible to describe how to trade every possible variation of the strategy that could occur. This why demo trading the strategy, before live trading, is encouraged. Understand the guidelines and why they are there, so if conditions are slightly different on a particular day you can adapt and won’t be frozen with questions.

For example, above we stated that if the price initially moves more than 30 pips in one direction, but then reverses and moves 15 pips beyond the other side of the 8:30 price, we will now look for trades in this new direction. 15 pips are just a guideline because it helps to show that the momentum has totally shifted it. That may be evident before the price moves 15 pips beyond the 8:30 price, or sometimes it may require more of a move to signal the reversal has really occurred (for example if the price is just whipsawing back and forth. Seeing the reversal is what matters, not the15 pips.

If the initial move was down, but the price stalls out and makes several attempts to move lower but can’t, and then has a huge and sharp move to the upside, that is a reversal. The bias should be to take long trades. even if the rally is still below the 8:30 price.

Trade the strategy several times and understand the logic for the guidelines. That will make you much more adaptable, and you will be able to adapt the strategy to almost any condition that may develop while trading the aftermath of the NFP report.

You may also find that under certain conditions the target price isn’t realistic for the movement the market is seeing. Depending on the entry price, the target may be way out of the realm of possibility, or it may be extremely conservative. Again, adapt to the conditions of the day. If the profit target seems way out of wack, use a 3:1 reward to risk target instead. The goal is to place the target at a logical and reasonable location based on the trend and volatility. The profit target method helps do that, but it is only a guideline and may need to be adjusted slightly based on the conditions of the day.

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