What is NFP and how to trade it? Forex trading for beginners
Non-farm payroll is an economic report that is released once per month. It has huge importance within the forex market as it creates large volatility and price movements. In this article, you will learn how to trade this move without getting knocked out by the irrational volatility it can create.
What is NFP?
The non-farm payroll (NFP) report is a key economic indicator for the United States economy. It represents the number of jobs added, excluding farm employees, government employees, private household employees and employees of nonprofit organizations.
NFP releases generally cause large movements in the Forex market. The NFP data is normally released on the first Friday of every month at 8:30 AM ET. This article will explain the role NFPs play in economics and how to apply NFP release data to a forex trading strategy.
The non-farm payroll report causes one of the consistently largest rate movements of any news announcement in the Forex market. As a result, many analysts, traders, funds, investors and speculators anticipate the NFP number and the directional movement it will cause. With so many different parties watching this report and interpreting it, even when the number comes in line with estimates, it can cause large rate swings. In this article, you will learn how to trade this move without getting knocked out by the irrational volatility it can create.
How does the NFP affect forex?
The non-farm payroll report causes one of the consistently largest rate movements of any news announcement in the Forex market. As a result, many analysts, traders, funds, investors and speculators anticipate the NFP number and the directional movement it will cause. With so many different parties watching this report and interpreting it, even when the number comes in line with estimates, it can cause large rate swings. Learn how to trade this move without getting knocked out by the irrational volatility it can create.
Analysing the non-farm report number
Like any other piece of economic data, there are three ways to analyze the U.S. non-farm payroll number:
- A higher payroll figure is good for the U.S. economy. This is because more job additions help to contribute to healthier and more robust economic growth. Consumers who have both money and a job tend to spend more, leading to growth. As a result, foreign exchange traders and investors look for a positive addition of at least 100,000 jobs per month. Any release above—let’s say 200,000—will help to fuel U.S. dollar gains. An above-consensus estimate release will have the same effect.
- An expected change in payroll figure causes a mixed reaction in the currency markets. Forex investors witnessing an expected change in the NFP report will turn to other sub-components and items to gain some sort of direction or insight. This includes the unemployment rate and manufacturing payroll sub-component. So, if the unemployment rate drops or manufacturing payrolls rise, currency traders will side with a stronger dollar, a positive for the U.S. economy. But, should the unemployment rate increase, manufacturing jobs decline, investors will drop the U.S. dollar for other currencies.
- A lower payroll figure is detrimental for the U.S. economy. Like any other economic report, a lower employment picture is negative for the world’s largest economy and the greenback. Should the NFP report show a decline below 100,000 jobs (or a less-than-estimated print), it’s a good sign the U.S. economy isn’t growing. As a result, Forex traders will favour higher-yielding currencies against the U.S. dollar.
Trading news releases
Trading news releases can be very profitable, but it is not for the faint of the heart. This is because speculating on the direction of a given currency pair upon the release can be very dangerous. Fortunately, it is possible to wait for the wild rate swings to subside. Then traders can attempt to capitalize on the real market move after the speculators have been wiped out or have taken profits or losses. The purpose of this is to attempt to capture rational movement after the announcement, instead of the irrational volatility pervading the first few minutes after an announcement.
The release of the NFP generally occurs on the first Friday of every month at 8:30 a.m. EST. This news release creates a favourable environment for active traders because it provides a near guarantee of a tradable move following the announcement. As with all aspects of trading, whether we make money on it is not assured. Approaching the trade from a logical standpoint, based on how the market is reacting, can provide us with more consistent results than simply anticipating the directional movement the event will cause.
How does this affect other pairs
The NFP data is an indicator of American employment, so your currency pairs that include the US dollar.
It can still effect other pairs like CAD/JPY for example, so please be cautions when trading during NFP
Other currency pairs also display an increase in volatility when the NFP releases, and traders must be aware of this as well, because they may get stopped out. The chart below shows the XAU/USD during the NFP data release. As you can see, the increase in volatility could stop a trader out of their position.
Top tips & strategies
We have rounded up 4 tips to remember when trading the NFP in forex:
- NFP data is released on the first Friday of every month.
- The NFP data release is accompanied with increased volatility and widening spreads. With this being said you must take caution when trading on NFP days.
- Currency pairs not related to the US Dollar could also see increased volatility and widening spreads. Gold, GBP, AUD and other pairs can become incredibly volatile.
- Trading the NFP data release can be dangerous due to the increase in volatility and possible widening of spreads. To combat this, and to avoid getting stopped-out, we recommend using the right leverage, or no leverage at all.
NFP trading can provide benefits to traders trying to profit on highly volatile price movements. However, it is extremely difficult to determine the direction of the price before the move has happened. At starttrading.com we recommend waiting at least 15 mins after a high impacting news event to enter a trade, allowing you to better perspective on how the news will affect the price.