How to trade the Non-Farm Payroll in Forex
Did you know there are more to trading Forex than just looking at price charts?
Would you drive your car by only using your rear-view mirror?
Of course not, you’ll use something called a windscreen!
In the same way, only trading with price charts alone puts you at a disadvantage.
That is where the importance of Fundamental Analysis comes into play.
Market fundamentals give us the reasons WHY prices are moving. In contrast, price charts show us HOW the price is moving.
There is a massive difference between the two.
Many retail traders are very afraid of trading news events.
That is usually because they have been taught to stay away from news events by so-called ‘experts’.
For the most part, they ignore news events because they don’t know how to interpret them.
Fundamental Analysis is a quantitative and qualitative way of evaluating the impact of economic data.
The means, the Fundamentals can show us how to interpret news events and profit from them.
Whether you are a new or experienced trader, you’ve probably heard of Non-Farm Payrolls.
It’s the most volatile and most traded news event in the Forex Markets!
Below is a list of the topics we’ll discuss:
What exactly are the Non-Farm Payrolls?
The Non-Farm Payroll, or NFP for short, is the monthly employment report for the United States. The report tracks how many jobs the US economy added or lost from month to month.
We call it Non-Farm because it excludes jobs in the agricultural sector. Jobs in the government is also excluded from the report.
So, what is the big deal about the NFP report anyway?
Well, employment is a very important measure of economic health.
The employment condition is a good gauge of where an economy is in relation to the business cycle.
The Federal Reserve is the central bank of the United States.
One of their key mandates is maximum employment in the USA. Why is this important to us as traders?
It’s important because the Federal Reserve is in control of monetary policy in the USA.
This means, they are the ones that determine when to raise or cut interest rates.
Now, if you don’t already know this, INTEREST RATES are VERY IMPORTANT in FOREX!
When interest rates increase, the corresponding currency value usually increases as well. The opposite is also true.
When employment numbers deviate from the target, the Federal reserve could adjust interest rates.
Thus, employment numbers can bring about interest rate changes.
When are the Non-Farm Payrolls released?
The NFP report is compiled by the US Bureau of Labor Statistics or BLS for short.
They are the go-to agency in the US for statistics about the economy.
They release the NFP report on the first Friday of every month at 08:30 AM Eastern Standard Time.
An important thing to know about NFP
This is where things get exciting. Most retail traders don’t know how to interpret the Non-Farm report.
There are often very volatile and erratic moves with the NFP. This can scare a lot of traders away.
However, with a good fundamental analysis approach, you don’t have to fear the NFP.
Instead, you can be one step ahead of most traders who simply just jump in unknowingly!
Some traders just trade the jobs numbers and hope for the best.
Even scarier is some traders that place pending trades before they have seen the data.
That is not a wise way to approach the NFP report! Wait for the data and then place your trades.
You see, there are times to trade the NFP, and then there are times to sit out.
Knowing when to trade it and when to skip it can make a big difference in your success.
The first thing you need to realize is that the NFP report consists of more than just the jobs numbers.
There are also things like Average Hourly Earnings and the Unemployment Rate.
They can be just as important as the headline NFP number.
The best way to analyze the NFP report is by looking at all the elements and form a bias.
Elements of the Non-Farm Payroll Report
There are more to the NFP report than jobs numbers.
Average Hourly Earnings and the Unemployment Rate is also important.
The NFP is normally the only number inexperienced traders consider.
For this reason, the biggest reactions in the market usually occur from this number.
As discussed, the headline NFP number tracks the total amount of jobs added or cut in a given month.
This can be less and more important depending on the current hiking cycle of the Federal Reserve.
If the economy is at an economic peak, the market would be expecting good jobs numbers. This can cause the market to fade any overly positive numbers on NFP.
In contrast, if the economy is in a recession, then the market would be expecting low jobs numbers.
Thus, the markets might react frantically if there is a big positive surprise in jobs numbers.
The Average Hourly Earnings is used by many traders as a gauge of future inflation.
This means, if wages rise, they expect overall inflation to rise as well.
When inflation is expected to rise, the market expects interest rates to increase as well. As a result, positive wage growth is normally good for the US Dollar.
Then we have the Unemployment Rate. Many people misjudge its importance.
An important point is that the Unemployment rate is a counter-cyclical indicator. This means a low number is good and a high number is bad.
When Unemployment is high, the economy is struggling as fewer people can spend money.
If Unemployment is low, the economy is growing as more people have jobs and spend in the economy.
This usually increases expectations for GDP growth.
Thus, the Unemployment rate can have a big impact on the market. Especially if it signals possible slowdowns or upturns in growth.
How to analyze the NFP report?
Not every NFP report is tradable!
Yes, you read that correctly.
There are many NFP reports that do not provide high probability trading opportunities.
To understand how you can analyze the NFP report you need to understand the report itself.
Basic Fundamental Analysis can show us when an NFP report is tradable and when it should be avoided.
It all boils down to what the overall report says about the US economy.
With every NFP release, you need to try and place the probabilities in your favor. For example, try and trade the report when all the elements in the report are bullish or bearish.
Below is a very good example of an overall bullish NFP report.
Notice that the actual Non-Farm Payrolls number were much higher than the forecast.
The market expected 178K, but the actual was 312K.
Private Non-Farm Payrolls rose 301K versus the forecast of 175K.
The Average Hourly Earnings MM and YY numbers were higher than the forecast.
Lastly, the Unemployment Rate was unchanged at 3.7%. This would have been a perfect buying opportunity for the US Dollar.
All three important data points came out bullish for the Dollar. Thus, this could have been a good buying opportunity on the Dollar.
Let’s look at an example of an overall bearish NFP report below.
Notice that both the Non-Farm and Private Non-Farm numbers missed their forecasts.
Also, note that the Average Hourly Earnings MM and YY came in lower than expected.
Finally, the Unemployment rate remained unchanged at 3.9%.
All three important data points came out bearish for the Dollar. Thus, this could have been a good selling opportunity on the Dollar.
So, what about those times when the report is mixed with both bullish and bearish numbers.
Then you stay out of the trade!
How to trade the Non-Farm Payrolls Report?
After you have completed your analysis of the report you can look to take a trade.
Make sure that the data show a clear bullish or bearish bias before you enter.
Don’t risk unnecessarily by trading a mixed report.
There are a couple of ways that you can look to open and manage a trade you take after the NFP.
The most effective method for entering the NFP report is with patience! Wait for the initial volatility to calm down before you enter a trade.
After the initial volatility has calmed, you can use Fibonacci levels to find entries.
How you draw the Fibonacci will be dependent on your trade direction.
In bearish moves, you draw it from the high point to the low point (as seen above).
With bullish moves, you draw it from the low to the high point.
Then, wait for the price to pull back to a Fib level and take your entry. This should give you a much better entry price rather than jumping in directly after the news.
Your Stop Loss can be placed above or below the recent swing points.
The profit targets for these types of trades will vary greatly.
The Stop Loss is much easier to place compared to your Take Profit. There is no real concrete answer for where to place your profit target with these types of moves.
It will depend on whether you trade it as a day trade or as a longer-term trade.
For short day trades, we would be happy to target anything from 20 to 50 pips. If it is a longer-term trade the targets can go to about 100 to 150 pips.
This is where the fundamentals are important.
It will give you an idea of how far a move ought to go based on the reasons behind the move.
So, we trust the info we have shared in this article will give you more confidence in the Fundamentals.
There is no reason for traders to be afraid of economic data.
If you understand the dynamics, these events can create great trading opportunities. There is a lot more to markets than just staring at price charts.
Getting to grips with the reasons why the market is moving will change your trading for the better.
Does this mean that the fundamentals are easy?
Absolutely not, trading successfully is never easy. But if it was easy everybody would be doing it.
As an extra note, make sure to always do good risk management when trading news events. They can be volatile and very dangerous if you don’t know what you’re doing.
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