How to Trade the NFP
The nonfarm payroll, or simply the NFP, is always an important and influential event in the economic calendar. But what is the nonfarm payroll? When is it? And how should it be interpreted? In this article, we answer these questions, examine how to trade NFP, provide an example of an NFP trading strategy and much more!
Table of Contents
What Is Nonfarm Payroll?
The nonfarm payroll is one of the most eagerly anticipated economic indicators for the US economy.
The NFP report is a measure of the number of US workers in the economy. It is released once a month by the Bureau of Labor Statistics (BLS) as part of their ‘Employment Situation’ report, and shares the number of jobs created, or lost, in the previous month.
As such, the nonfarm payroll is viewed as a key indicator of the health and productivity of the US economy in general and the labour market specifically.
As the name suggests, farm workers are excluded from the statistics, but so too are those employed by:
- Non-profit organisations
- Private households
- The Federal Government
This nonfarm classification reportedly accounts for approximately 80% of workers who contribute to Gross Domestic Product (GDP).
When Is NFP Released?
The nonfarm payroll is usually published on the first Friday of every month at 08:30 New York time (NFP time UK: 13:30). Traders and investors can keep track of the NFP report, as well as other important economic events, by using Admirals’ Forex Calendar.
How to Read Non Farm Payroll Data
Before the publication of almost any macroeconomic indicator, including the NFP, forecasts are collected from economists and market analysts. This data can be easily found in the aforementioned Admirals’ Forex Calendar. Below is an image of the most recent NFP announcement in the calendar.
The last three columns are labelled Actual, Forecast and Previous and the figures denote the number of new jobs created. ‘Actual’ represents the figures from the scheduled NFP report and, subsequently, remains blank until after its publication. ‘Forecast’indicates the market consensus for the upcoming NFP figures and ‘Previous’shows us the results from the last nonfarm payroll.
Paying attention to the forecasted NFP results is of particular importance. If the NFP is reported in line with the forecast figures then the reactions in the markets tend to be minimal, as, because it is expected, it will have already been factored into asset prices.
It is when the actual result deviates significantly from the forecasted figures which can pre-empt a significant reaction from the market.
If the nonfarm payroll comes in lower than forecast – i.e. fewer jobs are created than expected – this reflects a slowdown in the job market which is taken as a negative for the overall US economy. Conversely, if the nonfarm payroll comes in higher than forecast, as is the case in the example above, this is usually considered a positive sign for the US economy.
However, if the nonfarm payroll increases too fast too quickly it can be interpreted as a precursor to an increase in inflation, which is not good for the economy. When this happens, it can spook the market, causing stocks to fall, as investors anticipate a potential interest rate rise.
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How Does NFP Affect the Forex Market
When the nonfarm payroll differs significantly from the forecast, there is usually a reaction in the markets. But how does NFP affect the Forex market specifically?
The NFP Forex impact tends to be limited to currency pairs which involve the US dollar. If the results come in higher than expected, this tends to have a strengthening effect on the USD whereas, if the result comes in lower than expected, the USD will often weaken.
At the time of writing, the most recent nonfarm payroll release provides a clear example of this situation.
Whilst the NFP was expected to report the creation of 180,000 new jobs, the figure actually came in at 150,000 (i.e. 30,000 lower). The effect on currency pairs involving the USD was almost instantaneous.
In the chart of the GBP/USD currency pair above, the red line indicates the release of the worse-than-expected NFP. Instantly, GBP/USD began to post gains, as the dollar weakened against the pound.
Regardless of the outcome of the NFP, currency pairs involving the USD tend to be volatile in the lead up to, and the time around, the announcement. If the result deviates significantly from the forecast, this volatility is likely to intensify.
This increased volatility inevitably provides trading opportunities, however, it is also accompanied by a significant increase in risk. Consequently, NFP trading can be risky. For this reason, many traders choose to stay out of the markets around its release. Those that do decide to trade should ensure they have proper risk and money management strategies in place.
NFP Trading Strategy Example
Based on what we have learned about the NFP and its potential impact on the Forex market, we can sketch a basic NFP trading strategy. Let’s look at the EUR/USD currency pair for our example and examine three different scenarios.
This table could provide the basis for a simple NFP trading strategy, with traders digesting the release and then taking a corresponding position in the market shortly after.
However, although just an example, there is a potential issue with trading the NFP in this manner. To understand it better, let’s take a look at the one minute EUR/USD chart from the most recent nonfarm payroll.
The red line indicates the time at which the NFP was released and, we can see straight away, that a large amount of the market movement takes place within the first minute; although in this specific example, the market does continue to trend upward for around 20 minutes afterwards.
This highlights an issue with trading the NFP after the results have been announced; by the time traders have accessed the results, digested the information, decided on a course of action and then executed it, they may have missed most of the market movement.
Remember that when you are trading Forex, you are not just competing against other retail traders, but also institutions and professionals who use sophisticated equipment allowing them to take positions in the market far quicker than your average trader.
Is there any way to account for this when trading the NFP?
NFP Strategy Example No. 2
In short, the answer to our previous question is, yes; traders can opt to trade the NFP before the results are announced. However, this course of action is not necessarily recommendable for beginner traders.
One way in which this can be done is by using something called an OCO order. An OCO order is made up of two separate, but connected, conditional orders, where a conditional order is one which is activated when certain criteria are met.
When using an OCO order, traders define criteria for two conditional orders. If the conditions for one order is met then it is executed, and the other order is cancelled – hence the name OCO – literally “One Cancels the Other”.
Unfortunately, the tools to create an OCO order are not included as a standard part of the MetaTrader trading platforms. However, fortunately for Admirals’ clients, OCO orders can be created using the Admirals Mini Terminal – which comes as part of the free MetaTrader Supreme Edition (MTSE) plug-in for both MetaTrader 4 and MetaTrader 5 (MT4 & MT5).
So, essentially, by using an OCO order, traders can create two pending, conditional orders prior to the release of the nonfarm payroll. One order for if the results beat the forecasts and one order for if the results fall short of the forecasts. If either of these scenarios transpires, and the market moves in the predicted direction, one of the orders will be executed and the other cancelled, which will potentially allow traders to catch more of the market movement than if they had entered the trade manually.
In the next section, we will take a closer look at how to create an NFP trading strategy using an OCO order.
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Trading NFP Breakout Strategy with OCO Order
One way in which traders can consider utilising an OCO order when trading the NFP is by using a breakout strategy. A breakout strategy consists of establishing a range around the price of an asset and then entering a long or short position once the price breaks out of this predetermined range.
If we examine the five minute EUR/USD chart for the last nonfarm payroll report, we can identify a trading range in the hours leading up to the report’s publication and use this as the basis for our breakout NFP strategy. Please bear in mind that this is strictly an example of a Forex NFP strategy and has not been tested in real-market conditions.
In the chart above, the high and low of the trading range prior to the NFP release are indicated by the green horizontal lines.
Once the range is established, we can open an OCO order consisting of one conditional sell order, to be executed if the lower bound is broken, and one conditional buy order, to be executed if the upper bound is broken.
In order to create the OCO order you need to firstly download the MetaTrader Supreme Edition plug-in for MT4 or MT5. Once downloaded, head to the Navigator window and select the Admiral Mini Terminal from the list of Expert Advisors, as shown in the image below.
Once selected, the Mini Terminal will appear on your chart. In order to create an OCO order, click the yellow button highlighted in the image above, which will open the market order. Here, you can select the order type of OCO breakout, before filling in all the details of your orders and setting the conditions under which they will be triggered.
Final Thoughts
Trading the NFP is not for everyone.
Many traders, and not just beginners, actively choose to stay away from the markets around the times of big news releases such as the nonfarm payroll, because of the volatility and wild market movements which can accompany these type of events.
Instead, this group of traders may watch what happens during the news announcement, wait for the market to settle, and then take a decision on what to do based on the announcement and how the market reacted.
If you do choose to trade during the NFP, it is highly recommended that you practise any nonfarm payroll strategy thoroughly on a demo trading account before implementing it on a live account.
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FAQ - How to Trade NFP
What Does NFP Stand for in Forex?
NFP stands for Non Farm Payroll.
What Does Non Farm Payroll Measure?
Non Farm Payroll measures the number of paid workers in the US economy, excluding workers who are employed by farms, the federal government, non-profit organisations and private households.
Why Is Non Farm Payroll Important?
The NFP is important to pay attention to, as it provides an indication of how the US economy is performing. It can also be used to speculate on inflation and, subsequently, future monetary policy decisions.
Is a Higher Non Farm Payroll Good?
Generally speaking, a higher non farm payroll indicates that the US economy is expanding, which is typically a good thing. However, when it rises too quickly, it can be a sign that inflation may be about to increase.
How Does NFP Affect Gold?
Although the NFP has no direct impact on gold prices, the way in which markets react to the announcement can indirectly affect gold prices. For example, a lower than expected NFP is generally perceived as a negative for the US economy. Given gold’s status as a safe haven asset, this may cause an increase in demand for the precious metal, supporting prices.
When the NFP increases too fast too quickly, it can be viewed as a precursor to inflation rising which, in turn, may cause the Federal Reserve to hike interest rates. Given that gold is typically observed to have an inverse relationship with interest rates, in this scenario, an increase in the NFP could cause gold prices to fall.
How Does Non Farm Payroll Affect Stocks?
As with gold, there is no direct relationship between the NFP and the stock market. However, if an increase in NFP causes concern about a subsequent increase in inflation, this can spook the stock market and cause share prices to fall, as investors worry about a rise in interest rates. Similarly, in a high interest rate environment, a decrease in the NFP may provoke a positive impact amongst stocks, as investors anticipate that the Fed may lower interest rates.
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