Trading the Non-Farm Payroll Report



The Non-Farm Payroll report (NFP) is a key economic indicator for the USA. It is intended to represent the total number of paid workers in the US minus farm workers, government employees, private household employees and non-profit organization employees.

The NFP causes one of the consistently largest price movements of any of the news announcements in the Forex market place. As a result many analysts, trades, funds, investors and speculators anticipate the NFP number and the directional movement it will cause. With so many different parties watching the report and trying to interpret it, even when the numbers comes in close to the estimate it can still cause large swings. The secret to trade this indicator is to not get knock out by the irrational volatility it creates.

The NFP is announced on the first Friday of every month and 8:30am US ET. This announcement creates a very favourable environment of activity throughout the market by providing a near guaranteed tradeable movement opportunity at a predetermined time. As with all aspects of trading whether you make money or not is never assured. You need to approach trading from a logical standpoint based on how the market is reacting which will provide us with more consistent results than simply anticipating the directional movement that the event will cause.  

The key is knowing that the NFP is going to affect all the major currencies pairs, but historically it will affect the GPB/USD the most this makes this pair one of the favourite among traders. With the fact that the Forex markets can be traded 24 hours a day mean that everyone can trade these news release events.

Trading the news releases can be very profitable but it is not for the faint at heart. This is because speculating on the direction of a currency pair can be very dangerous. But if you wish to try your hand then you have a choice of three logical Strategies and we will discuss these:

  1. Get in Early

  2. Stay Out

  3. Trade the Aftermath

Strategy No.1 Get in Early.


This strategy can be use to trade all news releases but the NFP is by far the major mover of the Forex Market. Because we know exactly when the report is being released we can set up in advance. The objective is to capture the opening moves and try to profit from the big swings while not getting knock out with the whipsaw effect.

Set up: use either 15min or 5 min charts

You want to place your trades as close as possible to the time of the release, but not so close as to be court up in the spread widening and not so far away as having the market move on you and take you out before the release. So it is best to place orders about 15 minutes before the release. Look on your chart and you should see the market consolidating in to tight candles this represents little movement as buyers and sellers wait for the release. Place one horizontal so as it just touches the trips of the spikes on the high side and do the same with the low side of the consolidation range. You know that as the market reacts to release it is going to go one way or the other. The first reaction will happen in the first 5 to 15 minutes and it will nearly always be a big spike in one direction and then the other. Sometimes this movement can be over 100+ pips, this is called the whipsaw effect, and with the early strategy this is what we will be looking to capture. We do not know which way the price will go so we will place trades both side to the line just far enough away as not to be pulled in by any false spikes, so place your trades about 20 pips above and below the horizontal High, Low lines with tight S/L 20pips T/P 3:1 or 4:1 ratio, trailing stop set at 20 pips. Remember this strategy is very dangerous and not for the faint hearted, the reasons being will be discussed in strategy No.2. But if you are an aggressive trader and have a reliable broker and want to take better advantage of this movement, then just widen the stops and ratios but keep trailing stops at 20 pips.


Strategy No.2 Stay Away.

If you miss the timing for the first strategy, never try to jump in, it is just too dangerous. Because of sheer volume and the tactics brokers use to deal with the challenge of this volume. As the release time approaches a lot of the brokers widen their spread to cover themselves against trades they are unable to pass through to the market. This spread increase can sometimes be out to 10 to 20 pips. On the other side, many times your stops get taken out with the whipsaw effect or worst still the market moves so fast as it returns and reacts the software just does not have the time and does not take out your stops at all and you wind up with an unexpected huge loss. This is one of the great downsides of using an ECN broker at these times as you have to wait for someone else to take the other side of your trade to trigger your S/L and if the market is move that fast you just miss out as the market moves against you. This is why I say to save you time and money Stay Away and just watch. Recommendation Stay out of the market 15 minute before the release 30 minute to an hour after the release.  And if you want to trade the news releases then use the following strategy.

Strategy No.3 Trade the Aftermath:

The best way is to wait for the wild rate swings to subside, and then trade on the correction of the market, fortunately then you have the benefit of trading into and capitalizing on the on the real market movement after the feeding frenzy has finished. The best strategy is to attempt to capture rational movement after the announcement rather than irrational volatility in the first few minutes after the announcement. Usually after 30 minutes or so the market has had time to digest the numbers and the true reaction start to emerge and this most often than not will set the pattern for the day. This makes it business as usual.

The difference between gambling and trading is the way you approach the situation. Good traders will always approach a wonderful opportunity like trading the NFP news release with a clear defined plan to minimise risk with good money management set in place and those policies never change. Oh yes they do understand the dangers and you need to know these as well. Just adopted these three strategies and combine them with good money management policies and you will be able to develop the skill to trade great opportunity moments like the Non-farm Payroll release.

The Definition of Luck is Opportunity meets Preparation. If that is the case then I wish you Good Luck.
 
     
 
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