Non-Farm Payroll report is one of the most anticipated and tracked economic news report in the forex market. Released the first Friday of each month, the report details the employment status in the U.S, conversely painting a clear picture of the health of the U.S economy.
The report is known to trigger elevated volatility levels, which gives rise to trading opportunities on causing massive reshuffling of positions in major currency pairs. While the report tends to trigger 75 to 100 pip movements, the report can cause currency pairs to move by more than 200 pips in volatile sessions.
Analyzing NFP Report
The first step to trading the Non-Farm Payroll report entails understanding what the actual number implies. Like any other economic report, the NFP report can either:
• Beat expectations
• Fail to beat expectations
• Meet expectations
A higher payroll figure translates to the NFP beating expectations. This means the U.S economy added more jobs than expected, conversely affirming robust economic growth. More people with jobs means more disposable income leading to more economic growth.
A better than expected NFP figure often leads to the strengthening of the U.S dollar against the majors. In this case, traders use the opportunity to sell EUR/USD, GBP/USD, and CAD/USD pairs given the dollar strength.
A lower payroll figure means the U.S economy failed to add an estimated number of jobs. Similarly, it could be indicative of further contraction in the economy, painting a negative picture of the health of the world’s largest economy.
While a lower NFP figure is associated with weakness in the U.S economy, the same often results in weakness in the U.S dollar. In this case, traders use the opportunity to buy EUR/USD, GBP/USD, and CAD/USD pairs on taking advantage of weakness in the U.S dollar.
NFP Expected Change
An expected change means the NFP figure met expectations on the number of jobs added in the economy. Such a figure is often the subject of mixed reaction and interpretation in the currency market. This is because traders turn to other components of the report to try and understand how the economy is faring.
Some of the components that come under scrutiny when NFP meets expectations include the unemployment rate and the manufacturing payroll sub-component. In case the unemployment rate declined, and the manufacturing payroll rose, the same signals strength in the U.S economy often followed with strengthening of the dollar against other majors.
Similarly, if the unemployment rate increased while the manufacturing job component dropped, the same signals weakness in the economy, often triggering weakness in the dollar.
NFP Trading Dos and Don’ts
While trading economic releases can be very profitable, it is important to be extremely cautious given the volatility that the report tends to trigger. A wrong move can trigger an exponential increase in losses as prices tend to move fast.
For this reason, traders looking to day trade the Non-Farm payroll report are always encouraged to wait for the wild swings in the market to settle. Once the swings settle, it becomes pretty easy to determine the direction that the market is moving depending on the currency pair one is trading.
While trading the NFP, the idea is to capture a rational price movement instead of the irrational volatility that comes into play a few minutes after the report.
The Ideal NFP Trading Strategy
While the Non-Farm Payroll affects all the major currency pairs, it is important to choose a pair likely to generate more pips, depending on the report outcome. In this case, the EUR/USD and GBP/USD pairs tend to be the most volatile and ideal to trade the NFP report.
Having chosen a currency pair to trade, the next step is to wait for the NFP figure and the market to digest the information. It is important to refrain from entering positions immediately after the report is out.
This is because market participants take time to interpret what the number means. The wild swings that come into play immediately after the report, makes it impossible to determine the appropriate direction the market is likely to move.
Once the market has had a bit of time to digest the number, a trend often emerges as price starts to move in a given direction as traders place trades in the direction of the dominating momentum. A market signal to enter can come in the form of a big signal candlestick, such as an engulfing candlestick shown below.
An engulfing signal as the one shown above indicates that market participants have chosen the direction to take the rates.
Rules of Engagement
• The strategy can be tested in a five or 15-minute chart
• No position should be opened after the report, wait for at least five minutes
• A long position is opened when a subsequent bar closes above the inside bar
• A short position is opened when the subsequent bar closes below the inside bar
• A 30 pip should be placed to shield against trend reversal.
How To Day Trade The Non-Farm Payroll Report
The Non-Farm Payroll report is known to give rise to unique trading opportunities ideal for day trading. The volatility that the economic report triggers goes a long way in making it easy to day trade some currency pairs.
Known to trigger 75-100 pip movements in major currency pairs, the NFP report is one of the most tracked economic releases. Likewise, it gives rise to great opportunities for day traders that look to make good use of volatility.
Below are some of the ways to day trade the Non-Farm Payroll Report
Choosing the Ideal Currency Pair for Day Trading
When it comes to day trading the NFP report, it is important to settle on a currency pair that the report is likely to have the biggest impact on. Nothing comes close to the impact that the report has on the EUR/USD pair.
The EUR/USD is the perfect currency pair to day trade heading and into the NFP report ,partly because it is the most traded in the currency market. Similarly, it offers the smallest spread and ample price movement ideal for generating optimum reports once traders start reacting to the report.
NFP Report Rules of Engagement
Upon settling on the EUR/USD pair, it is important to ensure there is no open position heading into the report. All positions should be closed ten minutes prior to the NFP report hitting the wires.
The idea is to only open positions once there is a clear understanding of the NFP report’s outcome. This is done to protect a trading account from the wild swings that come calling when the report is out, which often lasts minutes, sometimes more.
Understanding what the NFP report Implies
Once the NFP report is out, it is important to take some time and interpret what the actual number means. If the figure is much higher than what was projected, the U.S dollar will likely strengthen. If the final figure fell short of estimates, chances are high that it could trigger weakness in the dollar.
Similarly, if the NFP figure met estimates, it would be wise to pay close watch to the other metrics such as average hourly hours, the unemployment rate, and the manufacturing sub-component.
Establishing Direction of Trade
While focusing on the EUR/USD currency pair, the pair will likely rise or fall by at least 30 pips or more once the NFP report is out. The bigger the initial move, the better, as it makes it easy to establish a trade direction.
Day traders often use the initial move to establish the direction the market is likely to move once the wild swings settle. Similarly, if the EUR/USD pair moves up by more than 30 pips followed by a small correction, the likelihood of the price edging higher after the dust settles is usually high.
Likewise, if the price moves lower, after the report, by more than 30 pips followed by a small correction, then chances are high that the price will continue edging lower once the dust settles.
NFP Report Trade Set-Up
With the market now responding to the NFP figure, the focus shifts towards establishing the ideal point to enter a trade, after establishing the direction of trade with the first price movement.
After the initial move of 30 pips, it is important to pay close watch to any pullback that comes into play at least 5 one minute price bars. If the price moved up by more than 30 pips, the price must not drop below the 8: 30 am price point where the move higher began.
A minor correction would, in this case, signal bulls are in firm control, and that price is likely to edge higher. Price holding above the 8:30 am price point after the NFP report followed by a strong bull candle stock would essentially be a signal to enter a long position.
Similarly, if the initial move were 30 pips lower followed by a slight upward correction, it would be wise to wait for an ideal position to enter a short or sell position. As part of the correction phase price should remain below the 8:30 pm price point before the NFP report hit the wire. The correction up should also be small such that it does not erase the initial big move lower.
If this were to happen, then wait for a solid sell signal in the form of a strong bear candlestick, after a correction, to enter a short position to profit from price edging lower in continuation of the established downtrend.
Once a long position is entered, it is important to place a stop-loss order below the recent low formed prior to the entry. The stop-loss order will protect the trading account should the price reverse and starts moving lower.
Likewise, it is important to place a stop loss one pip above the recent high formed prior to entry in case of a short position. The stop-loss order will help protect the trading account should the price reverse and start moving higher against the short position entered.
The profit target will depend on the NFP report of the day. Sometimes, the report causes EUR/USD to move 50 pips within a couple of hours, while at times, it might cause the price to move by as much as 300 pips. Likewise, the price target will depend on what one wants to achieve in profits as well as the volatility triggered by the report.