What is NFP in Forex?

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Non-farm Payrolls (NFP) is one of Forex’s most influential market movers. In addition to central bank events and interest rate decisions, they are probably the most-watched Forex news items. However, their impact seems to be diminishing over the past few months.

Every Friday of each month, the Bureau of Labour Statistics releases information on new jobs created in the United States. The data includes all salaried workers, except government employees, private households, nonprofit organisations, and farmers.

Investors pay close attention to this report because it is an essential indicator for the US economy. As a result, prices can move significantly when released numbers contain surprises or significant changes.

We explain why understanding the implications of this release, reading the numbers, and trading NFP, in general, is so critical.

NFP trading: how does it work?

The news release is almost certain to move the market in a tradable direction, making trading NFP possible. The most famous pair among traders is the GBP/USD, despite the report impacting nearly every currency.

Analysts predict a weak dollar if NFP numbers are less than forecasts. On the other hand, the stronger the economy, the more investors will buy the dollar. This is a result of increasing employment levels and wages. Also, gold’s price is affected by the NFP, mainly when it is traded against the USD.

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The importance of the NFP for traders

The NFP data is keenly watched and analysed by currency traders, futures traders, stocks traders, and option market traders. According to Investopedia, this is because stocks and currencies are affected by NFP releases.

As the world’s largest economy and most important currency, the US dollar impacts other assets worldwide. Payroll data can vary significantly from month to month, depending on the economic policy decisions made by the Federal Reserve.

Financial markets can be volatile when participants’ views change. As a result, volatility can increase trading opportunities and profit potential. For outstanding profit potential, traders must incorporate NFP trading strategies that take advantage of the resulting volatility during the initial stages.

Analysis of the non-farm reports

US non-farm payrolls can be analysed in three different ways, as with any piece of economic data:

The US economy benefits from a higher payroll figure. The reason is that more job creation leads to a healthier and more robust economy. In addition, with a job and money, consumers tend to spend more, which leads to economic growth.

Due to this, foreign exchange traders and investors anticipate at least 100,000 new jobs every month. The release of 200,000 or more will contribute to US dollar gains. It will also be positive if the estimate is higher than the consensus.

In the currency markets, a change in payroll figures causes mixed reactions. So when forex investors witness an anticipated change in the NFP report, they will turn to other subcomponents and items to gain some insight or direction. Subcomponents to look at are the unemployment rate and the manufacturing payroll.

If unemployment drops or manufacturing payrolls increase, currency traders may side with a stronger dollar. The US dollar is likely to lose value if the unemployment rate increases and manufacturing jobs decline.

US economic growth is adversely affected by a lower payroll figure. An employment report with fewer jobs is adverse for the world’s largest economy and the dollar.

It’s a sign the US economy isn’t growing if the non-farm payrolls report shows a decline of under 100,000 jobs. Forex traders will therefore favour currency pairs with higher yields against the US dollar.

What can you do with the NFP data?

NFP’s high figure shows the US economy is doing well. As a result, the US dollar and stock market should be benefited. Conversely, low readings indicate a negatively impacted economy.

However, the unexpected happens when the market does not follow policy makers’ projections. Therefore, market expectations and unanticipated uncertainties are other factors that traders must consider.

As part of a general NFP report, the following variables are also measured:

1. Payrolls of private businesses
2. The unemployment rate
3. Workweek average
4. Hourly wage average
5. Rate of participation

Traders can get a preview a few days before NFP data is released of what to expect from headline news events.

If the NFP figures are higher than expected, it points to a strong economy, resulting in stronger currencies, especially the US dollar.

As soon as the NFP data is released, the market adjusts its price accordingly. In other words, a big NFP miss will result in a massive spike in the stock market. The market adjusts price movements based on the NFP numbers, whether below, above, or in line with expectations.

NFP’s effect on currency pairs

All major currency pairs which use the US dollar as a counter currency or base currency are affected by NFP data. EUR/USD, USD/CAD, USD/JPY, and GBP/USD are a few of these currency pairs.

Before initiating trades, traders need to compute the average volatility of earlier NFP releases, adjust profit targets and stop losses, and calculate the average volatility of the earlier NFP releases.

For example, using the same stop loss for USD/CAD and GBP/USD is a common mistake. Instead, the major currency pairs mentioned above are the best to trade after the NFP report was released.

Assets affected by the NFP.

1.   US Dollar

The US dollar is most affected by the NFP report. However, investors can expect the dollar to behave in a bullish manner when it’s trending positively.

2.   Gold

Gold’s price is affected by the NFP because of the dollar impact. However, as long as physical or industrial demand exists in the economy, a high NFP supports the price of gold.

3.   Indices

Indices are primarily affected by the NFP, which affects individual stocks. Non-farm payrolls are an essential tool for predicting market trends in bear markets. A weakening NFP, on the other hand, shows a change in market conditions, especially in low wages.

4.   Oil

The NFP influences oil, gas, and energy demand as an economic indicator. Home, industry, work, and travel use more energy when the report is positive. However, NFP, on its own, cannot predict the price of oil correctly.

Using the NFP trading strategy

Traders favour the GBP/USD over other major currency pairs in the NFP report. You can trade the news events  24 hours a day on the forex market since it is open 24/7.

Waiting for the market to digest the information is the logic behind the strategy. Participants will trade in the direction of the dominant momentum once the initial swings are over and after they have had some time to reflect on what the number means.

The market watches for signals that indicate where rates may go. As a result, we don’t get in too early, and we don’t have to risk being whipped out before the market has found its direction.

The Rules

• You can also use five-minute or 15-minute charts to trade this strategy. In the following examples and rules, a 15-minute chart will be shown, although these rules apply to a five-minute chart as well. Stick with one or the other timeframe if signals appear in a different time frame.
• On the 15-minute chart, no trading occurs during the first 15 minutes after the release of the NFP report (8:30 am to 8:45 am).
• From 8:30 to 8:45, a wide-ranging bar will be created. Then, in the immediate aftermath of the initial bar, traders watch for an inside bar (it does not have to be the next bar). Or in other words, they wait for the latest bar’s range to be inside the previous one.
• This inside bar’s high and low rates set up our potential trade triggers. The market participants can trade when a subsequent bar closes above or below the inside bar. Also, they can enter a trade immediately after the high or low is reached without waiting for the bar to close. Be consistent with your method.
• Set a stop loss of 30 pips on the trade you entered.
• Trade up to two times. Do not re-enter if you are stopped both A second trade can be made using the high and low of the inside bar.
• Time is the target. The majority of moves take place within four hours. Trades are typically exited four hours after they enter. Traders can use a trailing stop to remain in the trade.

Trading hours for NFPs

Monthly NFP reports are released at 8:30 EST (GMT-5) on the first Friday of the month. Forex trading is available 24 hours a day during weekdays, and it is incredibly open during the New York session, which begins at 8:00 ET.

The result is that traders can open positions immediately after the announcement, causing volatility during the short term. It usually takes around 4-5 hours for the NFP release to full effect.

However, keep in mind the market closes at 16:00 Eastern Standard Time (EST) on Fridays, so you will need to make your trades before then to avoid overnight holding charges.

Since traders are waiting for the NFP release, the week leading up to the release is typically calm, with very few price movements.

Day traders interested in small price changes or news traders whose news would affect the dollar could find trading during the NFP week profitable.

With pending orders, you can trade the NFP.

It is always recommended to set two pending orders between price release and reversion to ensure that you automatically catch price movement. However, there is a risk that whipsaws (spikes) might cross one price level before reversing for the primary trend.

Below is a step-by-step guide to making NFP trades with pending orders:

5. Within three to four hours before the release, open your chart in 5-minute time intervals and identify the highest and the lowest low in five-minute time frames.
6. Place two pending orders: one buy stop, located 5-10 pips above the highest high, and another sell stop, below the lowest low, opposite. If the market rises, a long position will open for the first pending order. In comparison, a short position will open for the second-order if the market declines. If the trend reverses, the risk level will reduce.
7. You should be able to activate one of your pending orders when the report is released. Cancel the other order right away.
8. If a trend reversal occurs, use the stop loss to protect yourself from huge losses, but it’s more likely that you will maintain that trend.
9. Decide on a profit goal before the report is released and keep to it. For example, if you double your profit, you may want to close your position (between the two pending orders) or use trailing stops.
10. Whipsaws are the most significant risk associated with this NFP trading strategy. For example, if there is a spike in a volatile market or two orders are too close to each other, they may both trigger, and a double loss could result in seconds. So be careful when placing pending orders.

FAQs

1.   NFP Trading: What Is It?

A Non-Farm Payroll report is published monthly, including earnings from all non-farm workers, whether they work for farms, private households, government agencies, or specific nonprofit organisations. The release of this indicator is almost guaranteed to cause a market move. A higher NFP number will lead to investors buying the dollar, whereas a lower number will mean investors are selling it.

2.   The NFP is released at what time?

Each month, the NFP is released at 08:30 EST (13:30 GMT) on the first Friday of the month. The market typically trades during the four hours following the release.

3.   How do you test the NFP?

The NFP data is released at 8:30 am ET by the Bureau of Labour Statistics on the first Friday of every month. You can check the release dates by visiting the Bureau of Labour Statistics website.

4.    Is it a great idea to trade the NFP report?

The NFP market can be highly profitable. However, risk management of the trade is crucial, and there is no guarantee that things will go your way. NFP trading often suits those who have experience with day trading and news trading.

5.   What is the best broker to use for trading the NFP?

It will help if you are looking for a broker that offers you an easy-to-use platform, fast execution speeds, and low cost to trade the NFP easily. However, no matter what factors you consider, the best broker for you will depend on several factors.

Bottom line

After the initial volatility of the NFP report has subsided and the market decides which direction it will take, the logic behind trading the NFP report is based on waiting for a minor consolidation, an inside bar.

As a result of moderate stop-loss, we have a good chance of profit from a significant movement that almost always occurs each time the NFP is released.

jason

Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.

Forex Content Writer | Market Analyst

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