How to Trade the NFP in Forex
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 the NFP, provide an example of an NFP trading strategy and much more!
Table of Contents
What Is the 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 are several other categories of employees, including:
- Employees of non-profit organisations
- Private household employees
- Unincorporated self-employed workers
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 published on the first Friday of every month at 08:30 New York time. Traders and investors can keep track of the NFP report, as well as other important economic events, by using Admirals’ Forex Calendar.
How to Interpret the NFP Report
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.
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 effects of the NFP tend 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 on 7 October 2022 provides a clear example of this situation.
Whilst the NFP was expected to report the creation of 250,000 new jobs, the figure actually came in at 263,000 (i.e. 13,000 higher). 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 better-than-expected NFP. Instantly, GBP/USD began to fall, as the dollar strengthened against the pound.
How to Trade the NFP
Regardless of the outcome of the NFP, currency pairs involving the USD tend to be volatile in the lead up to the announcement and, 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 and, 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 on 7 October 2022.
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 downward 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 Trading 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 MetaTraders 4 and 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 might choose to identify the trading range in the three hours prior to the report’s publication and use this for 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 of the three hours prior to the report’s release is indicated by a white horizontal line and the low by a red horizontal line.
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 shown below. 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.
To Trade the NFP or Not to Trade the NFP…
Of course, in addition to the example NFP trading strategies we have looked at, another option is to adopt a “wait and see” attitude.
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.
It can also be useful to backtest your strategy, by going back over historic price data and seeing how your NFP strategy would have worked in the past if you had used it. Note what would have gone right or wrong and adapt your strategy accordingly.
Final Thoughts
Trading the NFP is not for everyone and for more conservative traders perhaps the best thing to do is avoid the market around its release on the first Friday of every month.
However, there are many traders whose style depends on volatility and who, therefore, thrive under such conditions. Regardless of what kind of trader you are, all trading is risky and the presence of increased volatility significantly heightens this risk. This is why risk management is so important in trading.
Trade on a Risk-Free Demo Trading Account
Whether you’re a beginner or experienced trader, using an NFP trading strategy or something different, it’s always best to practise on a demo trading account before heading to the live markets. At Admirals, we offer traders access to a free demo account which allows you to practise using virtual currency in realistic market conditions, click the banner below in order to open an account today:
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