How To Trade The Non Farm Payroll Release

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Trading the Non-Farm Payroll Report

The non-farm payroll (NFP) report is a key economic indicator for the United States. It is intended to represent the total number of paid workers in the U.S. minus farm employees, government employees, private household employees and employees of nonprofit organizations. 

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.

Key Takeaways

  • Non-farm payrolls (NFP) are an important economic indicator related to employment in the U.S.
  • Understanding this data release can help set up forex trades to take advantage of unexpected changes in employment.
  • Technical analysis can be employed to the NFP report using 5- or 15-minute chart intervals.

Analyzing the Non-Farm Report Numbers

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 favor higher-yielding currencies against the U.S. dollar.

What Does Nonfarm Payroll Mean?

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 favorable 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.

The NFP Trading Strategy

The NFP report generally affects all major currency pairs, but one of the favorites among traders is the GBP/USD. Because the forex market is open 24 hours a day, all traders have the ability to trade the news event.

The logic behind the strategy is to wait for the market to digest the information’s significance. After the initial swings have occurred, and after market participants have had a bit of time to reflect on what the number means, they will enter a trade in the direction of the dominating momentum. They wait for a signal indicating the market may have chosen a direction to take rates. This avoids getting in too early and decreases the probability of being whipsawed out of the market before it has chosen a direction.

The Rules

The strategy can be traded off of five- or 15-minute charts. For the rules and examples below, a 15-minute chart will be used, although the same rules apply to a five-minute chart. Signals may appear in different timeframes, so stick with one or the other.

  1. Nothing is done during the first bar after the NFP report (8:30 to 8:45 a.m. in the case of the 15-minute chart).
  2. The bar created at 8:30 to 8:45 will be wide-ranging. Traders wait for an inside bar to occur after this initial bar (it does not need to be the very next bar). In other words, they are waiting for the most recent bar’s range to be completely inside the previous bar’s range.
  3. This inside bar’s high and low rate sets up our potential trade triggers. When a subsequent bar closes above or below the inside bar, market participants take a trade in the direction of the breakout. They can also enter a trade as soon as the bar moves past the high or low without waiting for the bar to close. Whichever method you choose, stick to it.
  4. Place a 30-pip stop on the trade you entered.
  5. Make up to a maximum of two trades. If both get stopped out, don’t re-enter. The inside bar’s high and low are used again for a second trade if needed.
  6. The target is a time target. Generally, most of the move occurs within four hours. Thus, traders exit four hours after their entry time. A trailing stop is an alternative if traders wish to stay in the trade.

Example

Figure 1: February 6, 2009. GBP/USD 15-minute chart. Time is GMT. Source: Forexyard

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Looking at Figure 1, the vertical line marks the 8:30 a.m. EST (1:30 p.m. GMT) release of the NFP report. As you can see from the chart, there are three bars, or 45 minutes, of back-and-forth action following the release. During this time, traders do not trade until they see an inside bar. The inside bar has a square around it on the chart. This bar’s price range is fully contained by the previous bar. Traders will enter when a bar closes higher or lower than the inside bar. The next bar’s close is circled, as that is their entry; it closed above the inside bar’s high. Their stop is 30 pips below the entry price, which is marked by a solid black horizontal bar.

Because their entry occurred at approximately at 9:45 a.m. EST (2:45 p.m. GMT), they will close out their position four hours later. By entering the trade at 1.4670 and exiting four hours later at 1.4820, 150 pips were captured while risking only 30 pips. However, it should be noted not every trade will be this profitable.

Strategy Pitfalls

While this strategy can be very profitable, it does have some pitfalls to be aware of. For one, the market may move in one direction aggressively and thus may be beginning to fade by the time we get an inside bar signal. In other words, if a strong move occurs prior to the inside bar, it is possible a move could exhaust itself before we get a signal. It is also important to note in high volatility times, even after waiting for a pattern setup, rates can reverse quickly. This is why it very important to have a stop in place.

The Bottom Line

The logic behind this strategy of trading the NFP report is based on waiting for a small consolidation, the inside bar, after the initial volatility of the report has subsided and the market is choosing which direction it will go. By controlling risk with a moderate stop, we are poised to make a potentially large profit from a huge move that almost always occurs each time the NFP is released.

Forex Strategy for Day Trading the Non-Farm Payrolls (NFP) Report

Here is a strategy for day trading the EUR/USD forex pair when the non-farm payrolls data is released on the first Friday of every month. The strategy includes what to do prior to the release, how to enter a position and in which direction, how to control risk and when to take profits. It also addresses position size (how big or small of a position you take) as this is part of risk management.

The non-farm payrolls report is one of the most-anticipated economic news reports in the forex market. It is published the first Friday of the month at 8:30 AM Eastern time by the U.S. Bureau of Labor Statistics. The data release actually includes a number of statistics, and not just the NFP (which is the change in the number employees in the country, not including farm, government, private and non-profit employees). Another metric included in the data release is the ​unemployment rate.

As one of the most-anticipated economic news events of the month, currency pairs (especially those involving the US dollar) typically see big price movements in the minutes and hours after the data is released. This makes it a great opportunity for day traders with a sound strategy to take advantage of the volatility. Below is a step-by-step forex strategy for trading the NFP report.

Trade the EUR/USD After the NFP Report

The EUR/USD is the most heavily traded currency pair in the world, and therefore it typically provides the smallest spread and ample price movement for making trades. There is little reason to day trade another pair during the NFP report.

Close all prior day trading positions at least 10 minutes prior to 8:30 AM ET when the data is scheduled to be released. For this strategy we DO NOT take positions before the announcement, rather we do nothing until the NFP numbers are released. When that occurs the price will see a big rise or decline which typically lasts for a few minutes (sometimes more). During that initial move we do nothing, we just wait.

For this strategy, use a 1-minute EUR/USD chart.

Initial Move Establishes First Trade Direction

Just after 8:30 AM ET the price will rise or fall rapidly, typically at least 30 pips or more within a couple of minutes. The bigger this initial move the better for day trading purposes.

The initial move gives us the trade direction (long or short) for our first trade. If the price moves more than 30 pips higher, we will want to go long. but only IF and WHEN we get a valid trade setup, which is discussed shortly.

If the price drops more than 30 pips, in the few minutes after the 8:30 AM release, then we will be looking to go short for our first trade. when and if a trade setup occurs.

In figure 1 (click for larger version) the price moves aggressively higher in the few minutes after 8:30 AM. That means we will be looking to buy when a trade setup occurs. The times on the chart are GMT, not ET. Therefore, 15:30 is when the news was released on the attached charts.

Wait for This Trade Setup

The initial rise or fall in the moments after 8:30 AM lets us know in which direction we will be trading. The next step is to wait for a trade setup. A trade setup is a sequence of events that must unfold in order for us to get into a trade. Since there is often a lot of volatility surrounding the news, we will look at a few variations of the setup, as no two days are ever exactly alike.

Here is what we are waiting for:

  • After the initial move of 30 pips or more, there must be a pullback of at least 5 one-minute price bars. This means that if the initial move was up, we want to see the price drop off the high of the initial move and stay below that for at least 5 bars (they don’t all need to be down bars). Preferably the pullback makes significant downward progress, but it must not drop below the 8:30 AM price where the initial move began. If the initial move was down, we want to see the price rally off the low of the initial move and stay above low that for at least 5 bars. Preferably the pullback makes significant upward progress, but it must not rise above the 8:30 AM price where the initial down move began.
  • By waiting for at least a 5-price-bar pullback you can draw a trend line across the highs of the price bars (if the initial move was up) or across the lows of the price bars (if the initial move was down). Note: you are drawing the trendline on the price bars that compose the pullback.
  • If the initial move was up, buy when the bid price breaks above the trendline. If the initial move was down, enter a short trade when the bid price moves below the trendline.

This is the simplest form of the strategy and is useful in most situations. Unfortunately, it is quite general, so occasionally the pullback may not provide a trendline that is useful for signaling an entry. In such cases, the alternative entry discussed in the next section may be helpful.

  • If a long trade is taken, place a stop loss one pip below the recent low that just formed prior to entry.
  • If a short trade is taken, place a stop loss one pip (plus the size of your spread) above the recent high that formed prior to entry.

Figure 2 (click for larger version) shows the strategy at work. The initial move was up, so we want a long trade. There is a pullback that lasts at least 5 bars, and the trendline is drawn along the price bar highs that compose the pullback. The price then breaks above the trendline signaling a buy. A stop-loss is placed one pip below the low of the pullback that just formed.

Alternative Trade Setup(s)

After the initial move, if the price pulls back more than half of the distance of the initial move (before breaking the pullback trend line and signaling an entry) then this alternative method can be used.

  • Once the price has pulled back more than 50% (can use a Fibonacci retracement tool), wait for the price to consolidate for at least two price bars. That means the price moves sideways for at least two minutes. Draw a line along the high and low prices of those two price bars once the second bar completes and the third bar is starting to form.
  • If the initial move was up, buy if the bid price moves above the high of the consolidation (the line you just drew). If the initial move was down, enter a short trade if the bid price drops below the low of the consolidation.
  • If a long trade triggers, place a stop loss one pip below the low of the consolidation.
  • If a short trade triggers, place a stop loss one pip (plus the size of your spread) above the high of the consolidation.

Figure 3 (click for larger image) shows an example of this strategy. The price rallies so we are looking for a long trade. The price pulls back and consolidates, but then it drops instead of rallying above the consolidation. In this case, there is no trade, because the price does not move above the high of the high of consolidation. As long as the price stays above where the initial move began we can continue to look for long trades.

In figure 3 the price doesn’t stay above where the initial move began. This sets up another alternative trade. If the price moves at least 15 pips past where the initial move began, we can look for a trade in this new direction, following a pullback. In figure 3 the price initially rallies but then collapses and moves more than 15 pips below where the initial move started. This big drop means we are now looking for short trades. When the price starts to ​pull back, look for either of the entry signals outlined in this section or the one above.

The price target has also been included in figure 3. How to establish the price target is discussed next.

Establishing a Profit Target

Because of the volatility surrounding the news announcement, how far the price moves from the 8:30 price can vary dramatically from one NFP day to the next. Sometimes it only moves 50 pips within a couple hours, other times it moves 300 pips or more in an hour or two.

That said, the initial move is all we have to give us some idea of how volatile the EURUSD is in response to this NFP report.

Since we are waiting for a pullback before taking a trade, once that pullback starts to occur, measure the distance between the 8:30 price and the high or low of the initial move (if the price starts jumping at 8:29 in the same direction, include that). This should be at least 30 pips or more.

Now, cut that number in half. For example, if the price moved 43 pips in the initial move, cut that in half and you are left with 21.5 pips. That latter number is how many pips away you will place your target (an offsetting order to exit the trade at a profit) from your entry price.

Figure 4 (click to see larger version) shows one of the same trades we looked at prior. In this case, the size of the initial move is 115 pips. Cut in half, our “profit target” is 57.5 pips.

Figure 3 also shows an example of the profit target method. In that case, the initial move was 56 pips, so cut in half, you are placing a profit target 28 pips away from the entry.

The Risk/Reward and Position Size

Before any trade occurs you know your entry price. because you know the high or low of the consolidation or the price where the trendline will be broken. Note that since trendlines are sloping the breakout price will change every bar.

You also know your stop loss location because you know where the recent high/low was prior to your entry. You also know your profit target because the initial move has already happened.

The difference between your stop loss and entry is your ‘trade risk’ in pips. The difference between your profit target and the entry point is your ‘profit potential’ in pips.

Only take a trade if your profit potential is at least 1.5x your trade risk. Ideally, it should be 2x or more. In the examples above the profit potential is about 3x the trade risk.

Position size is also very important. Only risk 1% of your capital on a trade. That means your trade risk, multiplied by how many lots you buy, shouldn’t be more than 1/100 of your account. For example, if you have $5,000 account, you can risk up to $50 per trade (1% of $5,000). If the trade risk is 20 pips, then your position size should be no larger than 2.5 mini lots (that means taking a trade worth $25,000, which will require leverage). With a 2.5 mini lot position, if you lose 20 pips you will lose $50. If your position size is bigger than that, you will lose more than $50, which isn’t advised for this account size.

How to Determine Proper Position provides more example of how to calculate the perfect position size.

ADAPT the Method, Don’t Copy It

The method described above is a guideline. It is impossible to describe how to trade every possible variation of the strategy that could occur. This why demo trading the strategy, before live trading, is encouraged. Understand the guidelines and why they are there, so if conditions are slightly different on a particular day you can adapt and won’t be frozen with questions.

For example, above we stated that if the price initially moves more than 30 pips in one direction, but then reverses and moves 15 pips beyond the other side of the 8:30 price, we will now look for trades in this new direction. 15 pips are just a guideline because it helps to show that the momentum has totally shifted it. That may be evident before the price moves 15 pips beyond the 8:30 price, or sometimes it may require more of a move to signal the reversal has really occurred (for example if the price is just whipsawing back and forth. Seeing the reversal is what matters, not the15 pips.

If the initial move was down, but the price stalls out and makes several attempts to move lower but can’t, and then has a huge and sharp move to the upside, that is a reversal. The bias should be to take long trades. even if the rally is still below the 8:30 price.

Trade the strategy several times and understand the logic for the guidelines. That will make you much more adaptable, and you will be able to adapt the strategy to almost any condition that may develop while trading the aftermath of the NFP report.

You may also find that under certain conditions the target price isn’t realistic for the movement the market is seeing. Depending on the entry price, the target may be way out of the realm of possibility, or it may be extremely conservative. Again, adapt to the conditions of the day. If the profit target seems way out of wack, use a 3:1 reward to risk target instead. The goal is to place the target at a logical and reasonable location based on the trend and volatility. The profit target method helps do that, but it is only a guideline and may need to be adjusted slightly based on the conditions of the day.

Non Farm Payroll News Forex Trading Strategy-Learn How to Trade Non Farm Payroll News

The Non Farm Payroll News Forex Trading Strategy is a currency news trading strategy you can use to trade the Non farm payroll data.

The are many new forex traders that don’t know what a non-farm payroll is. In here, I will give a brief run down of what a non farm payroll is and give you a system to trade the non farm payroll.

INTRODUCTION: WHAT IS THE NON-FARM PAYROLL (NFP)

The Non Farm Payroll , or NFP is one of the biggest currency news that is released every month.

When is the non-farm payroll news released? On The first Friday of Each month.

All you need to know now is that the non farm payroll reports shows the current state (how good or bad) of the US economy.

So…if the US economy is good, the value of US dollar goes up, if not, it goes down (or Euro rises up…if you are trading EURUSD).

WHY TRADE THE NON FARM PAYROLL?

There are those traders that don’t like trading news and there are those that like to trade currency news. For those that like to trade currency news, here are their main reasons:

  • trading the non farm payroll news can be really profitable, the thing is, you’ve got to get the direction right.
  • you make profits in matters of seconds and minutes and they are huge profits. In a matter of few minutes, price can move from anything 40-200 pips. On ordinary days, you’d average 40-70 pips move in a day compared to the price move due to the release of the non farm payroll news.

The important thing here is to note here is this: if you get the direction right.

SOME FOREX TRADERS WILL NOT TRADE THE NON-FARM PAYROLL

As always, what is exciting to some traders will not be so for others. So there are traders that will not trade the non farm payroll and here are some of their reasons for not doing so:

  • they think, its gambling trying to guess which way the market is going to move when the news comes out.
  • the tendency of price to whipsaw means that sometimes your trade direction may be right but you’d get stopped out prematurely when price whipsaws and hits your stop loss.
  • spread increase, which means your trading costs go up as time comes new to the non farm payroll news release.
  • liquidity can dry up and sometimes, if you are in the wrong direction, stop loss jumping can happen. What this means is that even though you have a stop loss to protect your account, due to the fast moving nature of the market when news is released, your stop loss won’t be hit and you can lose a significant amount of your account if this happens.

FOREX CALENDER AND WHERE TO GET NON FARM PAYROLL DATES

Nonfarm payrolls is an employment report released monthly, usually on the first Friday of every month.

The best place to get the forex calendar for other currency news as well as nonfarm payroll is at forexfactory and there you’ll have a list of dates and times where forex news will be released:

HOW TO TRADE THE NON FARM PAYROLL NEWS

With this Non Farm Payroll news forex trading strategy, you really do not care which direction the forex market will go when the new is released. Because what you are going to do is place two opposite pending orders on both sides to catch the price move in any direction it goes as soon as news is released.

The non farm payroll trading strategy is suitable in the situation where the market travels in a tight range before the news is released.

Non Farm Payroll News Forex Trading strategy Rules:

  1. 30 minutes before the non farm payroll news is due, open your chart in the 5 minute timeframe.
  2. Find the highest high and lowest low in this 5 min chart.
  3. Place 2 pending orders on both sides, a buy stop pending order at least 5-10 pips above the highest high and and a sell stop pending order 5-10 pips below the lowest low in that range.
  4. Then place your stop loss on either side for each of the pending orders: your stop loss for a pending buy stop order will be the level at where you place your sell stop pending order and vice versa.
  5. Then wait for news to get released and it will activate one of the pending orders. Whatever pending order that is not activated has to closed immediately.

TAKE PROFIT OPTIONS

Here are a few options on how to take your profits:

  • 2 times the range (example, if the distance between the high and low is 40 pips, then set your take profit level at 80pips)
  • or you can set your TP at 3 times the range
  • or another way is not to have a take profit target but to use a trailing stop and place it 3-5 pips behind the lower swing highs (for short entry trade) and ride out the price move until you get stopped out eventually. Do the exact opposite for a long(buy) trade.

DISADVANTAGES OF THE NON FARM PAYROLL NEWS TRADING STRATEGY

One of the big problems for forex traders trading the NFP is the price whipsaws. Price whipsaws can happen a few minutes before the news is released, this may be due to traders taking positions or exiting positions prior to the news being released and it can also happen a few seconds after the news is released.

See chart below to see what I’m talking about:

Disadvantages of trading the NFP (non farm payroll):

  • price spikes or whipsaws, which can tend to activate both pending orders and then hit your stop loss (if they are placed too close) and you have two loses, almost at the same time.
  • lack of liquidity can also mean that sometimes your pending order may get filled at a very bad price.
  • increase of spread before and just a few minutes after NFP news release.

BE CAREFUL WITH TRADING FOREX NEWS LIKE NON FARM PAYROLL

  • the movement of price when non farm news comes is very fast, so you can lose a lot of money if you get your direction of breakout wrong. If you thing, a 100 pip moves on the wrong side can wipe out your trading account, then you should’t be trading contract sizes that will exactly do that.
  • as mentions, forex brokers increase spread a great deal during major news events like the non farm payrol therefore you may have to place larger stop loss distance.
  • don’t get into the habit of trading every forex news you see…only trade ones that really matter or you have a good understanding of.

Don’t forget to share and tweet the non farm payroll news forex trading strategy to your friends by clicking those buttons below.

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