There are many factors that contribute to the direction of the forex market. These factors can be used to the advantage of a trader. Knowing these factors is the first step. The second step is knowing how to use it. There are also many strategies that can be used to trade in the forex market. Once you discover a strategy that works, it is best you stick with it. Some factors that influence the forex market includes government debt, terms of trade, inflation rates, interest rates, recession, political instability in a country, speculation and many more and the non-farm payrolls report (NFP). This article is dedicated to how the Non-farm payroll report (NFP) influences the forex market, what strategy to use before the NFP is released, how to enter a position and in which direction you should take.

The non-farm payroll report is a major economic indicator in the United States. It represents the total number of workers who have been paid in the United States of America excluding the government employees, private household employee, employees of nonprofit organizations and farm employees.

The non-payroll report is one of the most anticipated news reports in the forex market. It is usually published on the first Friday of the month at 8:30 AM East European time. The data doesn’t contain information of (NFP) but also other statistics like the unemployment rate. The release of the NFP is usually accompanied by big movements in prices of currency pairs especially the currencies involving the US dollar. The movements in price action in currency pairs occur from minutes to hours after the release of the report. This creates a great opportunity for traders to make a profit from the forex market.

How to analyze the non-farm payroll report.

  • A higher payroll figure is an excellent figure. Because more job addition enables the growth of a robust economic growth. This attracts foreign investors and foreign exchange traders to look for positive addition of jobs. A release above 200,000 will help fuel the dollar gains in the US. When the release is above the consensus it will still have the same effect.
  • When the report release is an expected change in payroll, there will be mixed feelings amongst traders in the currency market. Foreign investors will then turn to the other components of the report to attain some insight. If the unemployment rate is low and the manufacturing payroll is high, the dollar will grow stronger. In contrast, if the unemployment rate is rather higher than the manufacturing payroll the dollar will decline.
  • Lastly, a lower payroll figure will be fatal. If the non-farm payroll report shows a decline below 100,000 jobs, it is a sign that the USA economy is not growing as such investors and currency traders will start looking for other currencies to trade on.

NFP forex strategy

The report usually affects all major currency pairs.

The idea behind the strategy is to wait for the market to digest the significance of the information. The market participants will start entering trades in the direction with the dominating momentum after the initial swing. This avoids the probability of placing trades too early and losing them.

NFP trading Strategy. The rules

  • You should not do anything during the first candle after the report between 8:30 to 8:45 am EDT
  • The 8:30 to 8:45 am  candle will be barely predictable and will be vulnerable to sharp price swings.You must wait for the inside bar to occur after the initial bar.
  • The high and lows of the inside candle may be used as potential trade triggers When a candle closes above or below the inside candle, traders may consider opening a position on the direction of a breakout.
  • A stop loss of maximum 30 pips should be placed on the trades you make, however the real stop loss direction should be determined by leverage used and real account value. Remember that risking more than 5% for this type of trade hardly justifies the risk.
  • Makeup to a maximum of two trades. If both of your trades get terminated by stop loss orders, avoid immediate recovery attempts.
  • Most of the price action movement occurs within four hours.

Trading non-farm payroll profitably

Are you wondering about how to trade non-farm payroll? Below is a step by step systematic approach to using the Non-farm payroll report to make a profit on the forex market.

Trade the EUR/USD after the NFP Report.

This currency pair is the most traded pair in the forex market. You must close all trades at least 15 minutes before the release of the report. In other for this to work, do not take positions before the announcement. Wait till after the report has been released and abstain from taking any action within the first minutes after the report. Wait till the market has digested e the significance of the report and started take  clear direction. Then you make your trades too.

The initial move always establishes the first trade direction.

The price will either rise or fall after 8:30 AM ET, about 30 pips or more in the first few minutes. Take note that the bigger the initial move the better the trading day will be.  The initial moves give an idea of which trading direction to take. If the price moves pass 30 pips, traders will like to go long. But if the initial price moves below 30 pips then traders will like to go short.

Wait for the trade setup.

After the initial price action movement, you then wait for the trade setup. Trade setup is the series of events that will take place before we place a trade. After the initial 30 pips move, the price is likely to face some correction with at least 50% of the initial move. Once the retracement is completed you will very likely observe the price to get back to the initial point of where the pullback has actually started. After a series of pullback the price is very likely to start showing some signs of trend formation which can be confirmed by placing a trendline over highs or lows of the move. As such, a sell position may be considered in case of a sustained breakout above or below the trendline depending on the direction of the initial move.

Alternative trade setup.

This is an alternative setup that can be used. You can only use this in a situation where after the initial move if the distance made by the price pull is more than half of the distance of the initial move.

You have to wait for the price to consolidate for a minimum of two price candles, once the price has pulled back to more than 50%. Once the second candle completes and the third bar is starting to form, you draw a line along the high and low prices of those two price candles.

Buy if the  price moves above the high of the line you drew. This is for a case where the initial move was up. Enter a short if the price drops below the low of the line you drew. This is also for a situation where the initial move was down.

Place a stop loss one  below the line you drew when you making a long trade. Place a stop loss above the high of the line you drew when you making a short trade.

Setting profit targets

Due to the volatile nature of the news, how far the price moves from the initial release price can change drastically from one day to the next. Certain times it only makes 50 pips in a couple of hours, other times too it moves as high as 300 pips or more in an hour.

The basic idea is that the initial move is all we need to give us an idea of the level of volatility of the EUR/USD to the non-farm payroll report.

Since we have to wait for a pullback before making a trade, once the pullback occurs, measure the distance between the price at 8:30 AM and the high or low at the initial move. This should either be 30 pips or more than that.

Now divide the number into two equal halves.  For instance, if the price moved 51 pips at the initial move, divide that into two and you will have 25.5 pips. The last number is how far away your target has to be placed.

The reward or risk and the position size.

Now before you make any trade, you know your entry price. This is because you know the high or low of the consolidation.  Take note that since the trend lines are sloping, the breakout price will change at every bar.

Now you know your stop loss location because you have knowledge of where the recent high/ low was before your entry. You also know the profit you want to make because the initial move already happened.

Trade risk is the difference between your stop loss and entry. Profit potential is the difference between your target for profit and entry point.

Position size is also a very necessary aspect of the process. It is advisable to risk only 1% of your trading capital. This means that when you multiply your trade risk by the number of lots you buy, should not be more than 1/100 of your account.

Be Flexible

The trading style described above is a guideline to help you maximize the influence that non-farm payroll report has on the forex market to your advantage. Understand the guidelines so that even when you meet completely different situations you can adapt. Train yourself using this strategy in the demo to the point where you are comfortable with using it then can you apply it in real life. You may also find that in real life, under certain conditions the target price isn’t realistic for the price movement the market is seeing.  It is possible that the target price may not be possible depending on the entry price. In these conditions, you have to adapt in other to make the best out of the day.

The drawbacks of trading NFP

Despite the fact that this strategy can be very profitable, it does have some downside. It could be possible for the market to move aggressively in a particular direction and  may begin fading by the time we get an inside bar signal. In other words, if an aggressive move occurs, it is possible for a move to exhaust itself before we get a signal. You should be able to spot highly volatile times because even after you have waited for a pattern setup the rates can just as easily reverse.

The Bottom Line

To crown it all, non-farm payroll trading is a very influential and useful tool to forex traders. So if you can understand the extent to which it can make the markets move, it will help you make a profit. And always never forget to put your stop orders on either a short or long term trade to reduce potential losses incurred to a minimum. Also, do not forget that it is not advisable to make trades within the first few minutes of the release of the report on the non-farm payroll simply due to the total unpredictability of the underlying movements.

By Ricardo Martinez

Ricardo Martinez has been active in the financial markets for around 10 years. In the early days in his career he was a trader and worked as market analyst in different online brokers advising clients on key decisions of trading instruments in foreign exchange and commodity markets. Ricardo is currently working as independent trader with diversified portfolio over different markets. His writing for LearnMarketonline is part of his commitment to share knowledge with traders.