How to trade NFP profitably
Everyone will agree that trading on the news is a very dangerous venture and requires nerves of steel. But with the right news selection, this tactic can bring in a lot of money in a matter of minutes. In this article, we will discover what Nonfarm payroll is, why is it so crucial to the economy, as well as how to trade the NFP report profitably.
What is NFP trading
The Nonfarm Payroll index is an indicator of the state of the labor market in the United States. Among other economic indicators, NFP is the second most important. The index shows how many jobs were created or eliminated during the past month. It does not take into account companies in the agricultural sector.
NFP indicates the unemployment rate in the state. The higher the number, the more people are employed. If a trader takes this economic indicator into account in his work, he gets the opportunity to place some trades that will bring a monthly profit.
NFP data is essential because it is published monthly, which makes it a very good indicator of the current state of the economy. The data is published by the Bureau of Labor Statistics, and the next release can be found on any Economic Calendar.
Employment is a very important indicator of the Federal Reserve Bank. When unemployment is high, policymakers usually pursue expansionary monetary policy (stimulative, low-interest rates). The goal of expansionary monetary policy is to increase production and employment.
Thus, if the unemployment rate is higher than usual, the economy is considered to be operating below its potential, and policymakers will stimulate it. The stimulative monetary policy entails lower interest rates and lower demand for the dollar (money flows out of the low-yielding currency).
The chart below shows how volatile the market can be after the NFP release. The expected NFP results for March 8, 2019, were 180k (jobs added), the actual result was 20k jobs added. As a result, the Dollar Index (DXY) depreciated, and volatility increased.
One should pay attention that the U.S. employment report consists of several important data:
- Non-Farm Payrolls
- Labor force participation rate
- Unemployment Rate
Most traders only look at employment data. This is often frustrating when markets seem to react irrationally with these releases.
However, basic fundamental analysis teaches us that some other data in a report can be equally important.
A great example of this is the labor force weight and the unemployment rate. Both can also cause big movements in the markets.
The first and most volatile reaction usually occurs with the NFP. The reason for this is twofold.
First, it is one of the most traded and expected indicators in the forex market. This means that a large number of market participants actively trade on this event.
As a result, a huge number of orders are placed before and after the release. The high volume of orders often leads to high volatility after the announcement.
Secondly, large differences between actual and expected values can cause a violent market reaction. With so many orders, a large deviation in the numbers usually leads to significant price movements.
Employment is a very important part of the economy. Thus, if the actual numbers differ sharply from the consensus, it can change monetary policy. This can cause a very unstable reaction in the markets.
How often does NFP happen
The Bureau of Labor Statistics usually releases NFP data on the first Friday of every month at 8:30 AM ET. Have you ever wondered why the 1st Friday of each month was chosen for NFP publication?
Turns out, it's for the stability of the stock market. If the forecasts of investors are too different from the published data, the exchange will simply close for the weekend, and emotions will not have time to affect the rate of currency pairs. Thus, the right timing is a preventive measure during crises in the economy. If the economy is stable, the effect is even more neutral.
However, the high emotional background of players, leading to a bright initial reaction, the subsequent correction (after the study of statistics), and the third stage of action after the release of comments of the head of the Fed, leads to high volatility. Profits on previously opened trades can disappear in a very short period. That is why most Forex strategies recommend not to trade during the release of important report data, especially Nonfarm Payrolls.
How to trade NFP today
The advantage of trading NFP is that the market reacts instantly to the release of the data. Let's have a look at the most popular NFP forex trading strategy.
The first thing to do is to close all currently open short-term positions because the release of important data can change the trend, which will not contribute to your trading results.
Second, 2-3 minutes before the release of the data to place two pending buy and sell orders (Buy Stop and Sell Stop), so you are ready for any outcome of the data. If the currency strengthens, the market opens the pending Buy Stop order and vice versa.
It is recommended to place pending orders at 15-25 points from the current price. To avoid the opening of the orders before the release of NFP data itself.
We recommend watching the chart in the 1-15 minute timeframe.
Thirdly, after the opening of one of the pending orders, the second (unopened) order is deleted, otherwise, we can get into a trading lock, when there are two open trades in opposite directions.
Fourth, you should set a Stop Loss and Take Profit. It is best to set Stop Loss immediately, i.e. above the opening price of the position. Take Profit is set at 30-50 points on currency pairs. When choosing a Take Profit, we should be guided by past data. Make sure to use the economic calendar for this purpose.
As a result, for 3-5 minutes of trading, we receive a $300-500 profit from each opened lot. The number of lots is calculated based on your deposit.
Of course, it is just one of many possible strategies to trade on NFP. Try several, in order to find the best one that suits your trading style.
Tips on trading the Nonfarm Payroll
For trading Nonfarm Payroll profitably, here are some tips to follow:
- Take into account that market volatility is influenced not only by the number of new jobs but also by changes in the unemployment rate and average hourly earnings. The dollar is no less sensitive to the latter figure.
- If you don't work on the news and don't intend to trade Nonfarm Payrolls, consider that volatility will still increase. And if you have any open trades, either close them or move your Stop Loss to breakeven.
- In case you are a long-term trader, do not forget that the average price movement is 50-60 pips, and the maximum is about 150-200 pips. It should be taken into account, and make sure to manage your open trades accordingly.