Contents
- What is NFP?
- How Does the NFP Affect Forex?
- The NFP Trading Strategy
- Strategy Pitfalls
- Tell Me the Importance of Non-Farm Payroll Reports?
- Which Currency Pairs are Most Affected by NFP?
- NFP Data and the US-Dollar Exchange Rate
- Non-Farm Payroll Release Dates
- How to Trade NFP and Understand the Jobs Data?
- NFP and the Economy
- Conclusion
- FAQs
What is NFP?
NFP means Non-Farm Payroll. As the name suggests, it is an indicator of economic activity in the financial sector, that is, it helps to indicate the economic state.
A typical non-farm payable report will contain the data about the number of jobs added, government employees, and other labour statistics excluding farm employees, private household employees, and staff members of non-profit organizations. This release causes considerable changes in the forex market.
NFP data is usually used for reflecting how many jobs have been created for non-agricultural businesses over the past month in America.
Asides from this, the nfp data release also covers the United States economic health. This NFP release usually affects the forex market and is always released on the first Friday of every month at 8:30 AM Eastern Time.
Also Read: The Data of the Forex Market
How Does the NFP Affect Forex?
NFP data affects Forex because it shows employment rates which is an indicator for currency exchange prices. This is because anytime the report is released, it indicates to traders the currency they should purchase. For example, if the numbers for employment rate is lower than the last report and payrolls for non-farm workers increase, it serves as an indication to traders that dollars are going to be stronger than Euro.
Also, anytime there is a high rate of unemployment, policymakers usually enforce monetary policies that are stimulators with low-interest rates, often referred to as an expansionary monetary policy. With this policy in place, there is a likelihood of an increase in economic output and employment.
The goal of this expansionary monetary policy is to stimulate the US economy anytime the unemployment rate is high leading to lower interest rates and reduced demand for dollars which in turn affects forex.
The NFP Trading Strategy
The NFP reports have effects on the forex market. This is because the data released affects all major currencies, especially the GBP/ USD.
Here is the best NFP forex trading strategy you need to know. This strategy relies on market news released every day. For this strategy to work, traders would be required to wait on markets to absorb data on its impact.
After strategically waiting a while, market participants would have had some time to think before eventually moving their market to dominate momentum. In essence, this wait is solely to check to see if the market has taken a certain course for the rate to rise.
For this strategy to work, certain rules must be observed. They include:
- Nothing should be done during the first bar after the NFP report has been released.
- Forex traders are to wait for an inside bar to occur after the first bar. This inside bar doesn’t necessarily have to be the next bar after the first one but they are to wait for the most recent bar’s range to be completely inside the previous bar’s range.
- Note that the inside bar’s high and low rate sets up possible trade triggers. So anytime a subsequent bar closes above or below the inside bar, traders often take a trade in the direction of the breakout. A breakout is when there is a sudden, sharp movement in the price of an asset.
- Place a 30-pip stop on the trade you entered.
- Ensure you have traded a maximum of two trades. If both get stopped out, that is both positions are closed by their brokers, traders must not re-enter. The inside bar’s high and low can also be used again for a second trade if needed.
- Remember that the target is a time target. All of the moves occur within four hours, so traders often exit four hours after their entry time. If the trader chooses not to exit, a trailing stop can be set as an alternative.
Strategy Pitfalls
The strategy mentioned above is highly profitable. However, it still has risks involved, which market analysts must be aware of.
One key pitfall to avoid when trading has to do with stopping. The reason for this is that the market could end up moving in one direction aggressively, so by the time you get an insider bar signal, it may already begin to fade.
In simpler terms, there’s a possibility that once a strong move occurs before getting inside the bar, then the move could exhaust itself before you can get a signal.
Also, there’s the risk of rates reversing quickly when there are high volatility times, although a trailing stop is a good alternative to avoid this.
Tell Me the Importance of Non-Farm Payroll Reports?
The payroll reports are important because it provides revealing insight release provide a revealing insight into the state of the world economy, by showcasing the way American firms operate.
Additionally, through the non-farm payroll reports released by the Federal Reserve, the Federal Open Market Committee, the FOMC can now make policies to encourage job growth of the population.
Also, high rates of job opportunities can indicate inflation pressure, thereby causing interest rates to rise.
Which Currency Pairs are Most Affected by NFP?
The NPF serves as an employment indicator in the US. The major currency pairs affected by the data release include USD/USD USD/JPY, AUD/USD/CHF.
Other currency pairs asides from these major pairs also experience an increase in initial volatility after the NFP report is released.
It is important to note that an increase in volatility can stop traders out of their positions even when trading in non-US dollar paired currencies. Therefore, traders need to make use of technical analysis and detailed market reaction data.
There would also be a need to adopt the pullback strategy rather than the breakout strategy. To use the pullback strategy, traders need to wait for a currency pair to retreat before entering a trade.
Also Read: What is Pairs Trading?
NFP Data and the US-Dollar Exchange Rate
Anytime there are positive NFP figures, it encourages a positive economy because currency traders can purchase more US dollars in the anticipation of significant price movements and a more robust economic future.
If the NFP figures are adverse, however, then the US-dollar exchange rate falls because investors sell their USD.
Non-Farm Payroll Release Dates
The Bureau of Labour Statistics, a unit of the United States Department of Labour, releases the non-farm payroll report every Friday at 9 p.m. Mountain Time Zone, MT.
The data containing the non-farm payroll report is usually posted on the Bureau of Labour Statistics website. However, non-farm payrolls are often unpredictable so whilst checking on the website, use the advanced forex strategy known as pulling- back.
Additionally, when using the pullback strategy, traders are advised to wait until pairs of currencies retrace before putting on a trade.
Forex Trading involves risk and so trading the NFP data release can be dangerous because of the increase in volatility and possible widening of spreads.
To combat this, the best investment advice is to make use of the appropriate leveraged trading to avoid getting stopped out.
How to Trade NFP and Understand the Jobs Data?
It is imperative to understand how to trade NFP. Already, the NFP forex strategy has been explained above to guide your trading strategy, however, traders sometimes find it hard to understand the NFP data due to the volatility of NFP releases.
There are usually two price reactions to any NFP data release:
1) You’ll get an immediate volatility spike
2) Prices often reverse more when traders digest the numbers and eventually, the price starts trending in the real direction.
For lack of confusion when trading the NFP, always remember that your trade trigger should be people’s reactions. This means don’t trade the actual NFP numbers but trade people’s expectations to those numbers.
The NFP release is a closely watched report which comes with three numbers: the previous from last month’s NFP, the predictions made by experts, and the actual numbers.
Three factors determine how people or investors can react to the NFP numbers. They are:
1) The actual number is higher than the forecast and previous NFP so the Dollar will likely rise
2) The actual number is lower than the forecast and previous NFP so the Dollar will likely fall
3) The actual number is higher than forecast and lower than the previous NFP (or vice versa) which could lead to no direction and confusion from investors.
NFP and the Economy
There are three separate parts of a news release for every NFP day:
1 The NFP numbers: this is the economic data showcasing the number of jobs that have been created or lost.
2 The unemployment rate: this displays the overall unemployment rate in the economy.
3 The hourly wages: this shows how much workers earn on an average, that is, the average hourly earnings of employees.
Conclusion
The secret to successful NFP trading is to always remember to never trade the actual numbers but to rather focus on people’s reactions or expectations to the NFP numbers.
The best NFP strategy is to predict a small consolidation inside the bar anytime the volatility of the report subsides.
FAQs
How does NFP affect Forex?
NFP affects forex because anytime the report is released, it indicates to traders the currency they should purchase. For example, if the numbers for employment rate is lower than the last report and payrolls for non-farm workers increase, it serves as an indication to traders that dollars are going to be stronger than Euro.
How do I trade forex with NFP?
NFP reports are always released at 8:30 a.m. Eastern Time on the first Friday of every month, so to trade, log to a trading platform and follow the basic NFP trading strategy.
What does NFP stand for?
NFP is an abbreviation that means Non-farm payrolls. It helps to calculate the number of jobs that have been added or lost every month in the U.S economy.
What is NFP and how does it work?
NFP is a key economic indicator that represents how many employees are being paid in the United States. It however excludes government employees, private household employees, farm employees, and employees of non-profit organizations. It works by following the NFP forex strategy.
