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Regardless of the danger, volatility is a trader's best friend as it is hard to profit when the market is not moving.
Although the forex market trades around the clock, almost all of its most volatile events are scheduled news releases. Among those, the Non-Farm Payroll report ranks high as it indicates the strength of the U.S labor market.
This article looks into its specifics and outlines a simple strategy that allows trading this event profitably.
What is the NFP?
So what exactly is NFP in forex? The Non-Farm Payroll (NFP) is a report published by The U.S Bureau of Labor Statistics that shows the monthly changes in U.S. jobs, excluding farm-related employment. This exclusion comes from strong seasonal tendencies in the agricultural sector that would skew the numbers at certain times every year, rendering the report less useful. Along with the Federal Reserve interest rates decision and the gross domestic product (GDP) projections, NFP is one of the strongest price drivers of the US dollar.
NFP includes vital data like the unemployment rate, average hourly earnings and the labor participation rate — providing a snapshot of the critical component of the U.S 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 working groups (men, women, ethnic groups), permanent job losers, long-term unemployment, labor force participation and those not in the labor force.
The Establishment Survey includes NFP employment, average hourly earnings and a further disambiguation per category — leisure and hospitality, professional and business services, manufacturing, construction, transportation and warehousing, wholesale trade or mining.
How Does the NFP Affect Forex?
NFP affects the forex market because the job reports paint the picture of the U.S economy — the largest in the world. Assessing the strength of an economy that engages in that much foreign trade impacts the world’s reserve currency, the U.S. dollar.
Thus, there is a surge in volatility after the release of NFP data since it is under the watchful eye of institutions and retail traders trying to enter new or liquidate existing positions.
Consensus plays a key role in the market's reaction to the data since a strong result, when expected, can be fully factored into the current price. Therefore, big moves are often the result of a relative surprise compared 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 an important event receives plenty of analyst coverage, market participants receive a heads-up two days before. On Wednesdays before the NFP report, Automatic Data Processing, Inc. (ADP) releases the ADP National Employment Report. This report, also known as the ADP Jobs Report, is a good forecast for the NFP report since ADP handles the payroll for around 20% of all privately-employed individuals in the U.S.
Currency Pairs Most Affected by NFP
An anticipated shift in the U.S. dollar supply or demand will primarily affect the main trading partners of the U.S., like the EU, U.K. and Japan. Thus, the most affected currency pairs would probably be EUR/USD, GBP/USD, USD/JPY, AUD/USD, and USD/CHF.
You can see the volatility from the following EUR/USD chart.
At 2:30 p.m. CET (8:30 a.m. EST), EUR/USD moves in a 50-pip range — half of the average daily range. This move is easily the largest move in a 5-minute time period within the session, and likely in the week as well.
The Simple NFP Trading Strategy
The NFP report release usually causes a level of volatility that increases the odds of getting slipped. 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 currency pairs that are most prone to high volatility during the NFP report. This example looks at 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. By this time, the initial burst should create a wide-range candle that is at least 50% of the average daily range (ADR).
- Look for an inside candle. An inside candle is a candle whose body, upper and lower wick are both inside the previous candle — in this case, an event candle. This candle doesn't have to occur immediately, but it should appear within 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 high of an inside candle — buy, and if it closes below it — sell.
- For the stop-loss, use the most recent low if you buy or the most recent high if you sell. Keep in mind that the stop loss should be at least 10% of the average daily range but not more than 30%.
- Plan the risk-to-reward ratio according to personal risk tolerance. Aim for it to be at least 1:1.
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Frequently Asked Questions
What are NFP signals?
NFP signals relate to the correlation between the strength of the labor market in the U.S. and the strength of the U.S. dollar. A high reading is seen as a positive (bullish) for the dollar, while a low reading is seen as negative (bearish).
How often is NFP released?
The NFP report is released monthly, on the first Friday of the month. Two days before that, ADP releases the ADP National Employment Report — a hint for the NFP report.
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