How Forex Traders Use NFP to Trade Effectively

In the forex market, the non-farm payrolls (NFP) report is one of the most highly anticipated news events and ranks as one of the biggest potential market movers. Central bank news releases and interest decisions are other factors that affect price movement in financial markets.

It’s worth noting that other currency pairs experience an increase in initial volatility after the release of the NFP report. So, traders need to be well-informed about this market expectation, says Tixee.

What is the significance of NFP to forex traders, and how can they use it to trade? Well, read on to find out.

An Overview of Nonfarm Payrolls

NFP measures the number of job additions or job creation in the United States during the month preceding the report and includes other labor market data. The non-farm payroll report does not include data for government employees, farm employees, private household employees, and nonprofit organizations. The United States Bureau of Labor Statistics releases the NFP report every first Friday of the month. Most active traders anticipate these economic news events because they indicate the US economy’s performance. Before the release of the report, job creation estimates are released in the form of consensus numbers drawn from various sources.  If the final report numbers vary significantly from the consensus numbers, this can result in potential swings for the USD and gold price. Currency pairs, especially those containing the USD, often see substantial price movements in the hours and minutes following NFP forex data release. This can create trading opportunities for conservative traders with an excellent trading strategy to take advantage of the uncertainty.

The Importance of NFP Data to Forex Traders

Due to their monthly release, NFP employment figures are crucial forecasters of the current economic state. The US Bureau of Labor Statistics is responsible for this economic data release, and investors can find the next update on an economic calendar. Central banks regard jobs as vital economic indicators. Should there be a high unemployment rate, most market participants follow an expansionary monetary policy because it tries to increase jobs and economic production.

Non-farm Payroll and the Economy

On each NFP day, investors expect to find the following:

• NFP numbers – it’s an analysis of the created or lost jobs.
• Employment data release – it shows the overall rate of unemployment.
• Hourly wages – an analysis of how much employees are averagely earning.

Simply put, the NFP offers data about the US economic output and what the future holds. If there is a strong economy, companies hire new employees who now have additional money to buy products and boost the economy. On the other hand, if the economy is in a downward trend, there is minimal hiring, and some companies even reduce their staff. Consequently, these individuals lose income and have little to spend. This reduces general consumer spending and overall revenue and adds pressure to the economy.

NFP Trading Pros

The NFP employment report has the potential to trigger significant price range movements compared to any other news releases in the currency markets. Due to this, most foreign exchange traders, stock traders, futures traders, currency traders and forex brokers wait for this data to determine its impact on the directional movement. With a considerable number of watching and examining this data, even though the report is in line with market expectations, it can trigger substantial rate movement of the major currency pair. These price fluctuations can result in potential opportunities for traders.

NFP Trading Cons

Some traders may be surprised to learn that NFP forex data is faulty. The government computes this employment report data by deducting the number of employment losses from job additions. This data is far from being precise because it’s released twice before its final release. Subsequently, the first statistic heard by investors is usually erroneous. What’s more, the error margin is larger than the actual amount.

How to Read NFP Report

Here are three main ways of reading this report:

• High Payroll Data Benefits the US Economy Broader employment leads to substantial and stable economic development. Individuals with jobs and income will spend, and this results in growth. Thus, a report that shows a significant increase in job additions can help as a driver for the United States dollar.
• Low Payroll Data is Bad for the US Economy Like any other economic analysis, a low employment figure is unfavourable for the globe’s largest economy and the USD. If the report shows a significant reduction in the number of jobs created, this could point to a potential drop in the value of the USD against other major currencies.

Currency Pairings Affected by the NFP

Being a forecaster of the strength of the American employment market, NFP data actual release mainly affects major currency pairings, including the EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, etc. The EUR/USD and GBP/USD are among the currency pairs that interest traders the most.

NFP Trading Strategies for Forex Traders

With most traders observing NFP forex data, it can lead to drastic changes in the currency market. The price can rise or fall based on how close the actual figure is to the forecasts ahead of the release. Several essential trading guides and strategies exist to help investors trade depending on the non-farm payrolls. The popular strategies include trading depending on the initial reaction and trading the trend. Here are some of the strategies popular with traders that follow the NFP report.

Fading the Initial Movement

The first strategy is to wait and assess how the market conditions react following the news release. Traders can expect to experience an initial knee-jerk reaction after releasing this data due to the likelihood of market initial volatility moves. Traders can combat this likelihood by utilising the ‘fading’ initial move strategy. For example, let’s assume NFP data exceeds the forecasts, and financial experts expect the USD value to rise against other major currencies like the GBP, the GBP/USD exchange rate improves. Consequently, the GBP moves higher than the USD. Fading this move means a trader has to wait for the initial movement to run its course, which typically only takes a few minutes.

Trading the Trend

This is a simple strategy where investors assume the initial market reaction and price target are correct. If the market sharply moves after the NFP release, traders believe that this is the beginning of the trading day ahead. Traders usually tend to assess the preceding reference points to approve a new trend. For instance, if the move break’s the previous day’s entry price, some traders see this as a considerable market sentiment change and expect the market target price to improve.

Another strategy to use to increase profit potential entails “initiating a trade a couple of minutes before NFP data release”, says Investopedia.

Although this technique boosts a trader’s potential profit target, it is risky because the wide range of market aspects can make the price react differently to the general expectations.

NFP Final Words

In summary, the NFP is a major indicator that offers essential data regarding the US economy. Many forex traders follow the report and open trades based on the NFP numbers that have a direct impact on the health of the US economy and have the potential to affect a number of currencies and other assets.