No matter the danger, volatility is a trader’s best friend because it is difficult to profit when the market is not moving.
Although the forex market trades around the clock, almost all of its most volatile events are timed news releases. Among these, the Non-Farm Payroll report ranks high as it indicates the strength of the US labor market.
This article examines its specifics and outlines a simple strategy that can trade this event profitably.
What is the NFP?
So what exactly is NFP in forex? The Non-Farm Payroll (NFP) is a report released by the US Bureau of Labor Statistics that shows monthly job changes in the United States, excluding agriculture-related employment. This exclusion stems from strong seasonal trends in the agricultural sector which would skew the figures at certain times of the year, making the report less useful. Along with the Federal Reserve’s decision on interest rates and gross domestic product (GDP) projections, the NFP is one of the strongest price drivers for the US dollar.
The NFP includes vital data such as the unemployment rate, average hourly earnings and labor force participation rate, providing insight into the essential component of the US economy.
Two components of the NFP report are the household survey and the establishment survey.
The household survey includes the unemployment rate, unemployment among major groups of workers (men, women, ethnic groups), people who have lost their permanent jobs, long-term unemployment, labor force participation and inactive people.
The establishment survey includes NFP employment, average hourly earnings and further disambiguation by category – leisure and hospitality, professional and business services, manufacturing, construction, transportation and warehousing, wholesale trade or mining.
How Does NFP Affect Forex?
The NFP affects the forex market because jobs reports paint a picture of the US economy – the largest in the world. Assessing the strength of an economy that engages in so much foreign trade impacts the world’s reserve currency, the US dollar.
Thus, there is an increase in volatility following the release of NFP data as it comes under the watchful eye of institutions and retail traders trying to enter new positions or liquidate existing ones.
Consensus plays a key role in the market’s reaction to the data, as a strong outcome, when expected, can be fully factored into the current price. Therefore, big moves are often the result of relative surprise to the consensus. Generally, strong job growth and economic expansion, signaled by better-than-expected job creation, are signs of dollar strength.
Non-Farm Payroll Release Dates
The Bureau of Labor Statistics typically releases NFP data on the first Friday of every month at 8:30 a.m. EST.
While such a significant event receives extensive analyst coverage, market participants receive a warning two days before. On the Wednesdays before the NFP report, Automatic Data Processing, Inc. (ADP) releases the ADP National Employment Report. This report, also known as the ADP Employment Report, is a good forecast for the NFP report because ADP manages the payroll of approximately 20% of all private employees in the United States.
The currency pairs most affected by the NFP
A predicted change in the supply or demand for US dollars will primarily affect major US trading partners, such as the EU, UK, and Japan. So the most affected currency pairs would likely be EUR/USD, GBP/USD, USD/JPY, AUD/USD and USD/CHF.
You can see the volatility on the following EUR/USD chart.
As of 2:30 p.m. CET (8:30 a.m. EST), EUR/USD is moving in a range of 50 pips, which is half of the average daily range. This movement is easily the most important movement over a 5 minute period during the session, and probably also in the week.
The Simple NFP Trading Strategy
The publication of the NFP report generally causes a level of volatility which increases the risks of slippage. This NFP trading strategy avoids the initial data release and waits for trend confirmation.
This strategy uses a 15 minute chart on one of the most volatile currency pairs during the NFP report. This example examines the EUR/USD pair and its price action during the NFP event.
- Wait for the NFP event and do nothing for at least 15 minutes after the announcement. At that time, the initial burst should create a wide-range candle that is at least 50% of the average daily range (ADR).
- Look for a candle inside. An inside candle is one whose body, upper and lower wick are both inside the previous candle – in this case, an event candle. This candle does not have to happen immediately, but it should appear in the next few candles, as a sign of temporary market exhaustion.
- Once an inside candle closes, its high and low now become a trigger point for the trade. If the price rises and closes above the top of an inner candle – buy, and if it closes below – sell.
- For the stop-loss, use the most recent low if buying or the most recent high if selling. Keep in mind that the stop loss should be at least 10% of the average daily range but no more than 30%.
- Plan the risk-reward ratio based on your personal risk tolerance. Aim for it to be at least 1:1.
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Frequently Asked Questions
questions and answers
NFP signals relate to the correlation between the strength of the US labor market and the strength of the US dollar. A high reading is seen as positive (bullish) for the dollar, while a low reading is seen as negative (bearish).
How often is the NFP published?
The NFP report is published monthly, on the first Friday of the month. Two days before that, ADP releases the ADP National Employment Report — an index for the NFP report.