Understanding Forex

How to use NFP data to help your forex trading

The non-farm payroll (NFP) report is a key monthly indicator for the United States, a regular “health check” representing the state of the nation’s economy. As we will demonstrate, it is also an important factor for any active trader involved in US dollar pairs, particularly those operating short-term positions.

The data is usually released on the first Friday of every month at 8:30am Eastern Time and reflects the previous month’s data.

The headline figure, representing statistics drawn from the previous month, is the number of jobs added, excluding farm employees, government employees, private household employees and the employees of non-profit organizations. In other words, it is theoretically an accurate expression of the direction of economic travel within the private sector, for companies both large and small.

How and why does NFP data trigger forex market moves?

NFP releases have a general tendency to cause large movements in the forex market. Employment is a very important indicator for the Federal Reserve Bank. High unemployment tends to require stimulatory measures to increase economic output and increase employment.

The most common reaction is for the Federal Open Market Committee to lower interest rates and that in turn reduces demand for the dollar.

Conversely, a high number of additional jobs – loosely, anything in six figures but particularly 200,000 or more - is likely to be a positive factor in terms of pushing U.S. dollar gains. A particularly positive forecast ahead of an NFP release can have the same effect, as can NFP data which radically outperforms estimates.

It’s important for all traders to understand that even in the pre-pandemic era NFP data has had a tendency to fluctuate wildly. It does not tend to follow gradual month-by-month inclines or declines.

How do FX traders take action on NFP data?

Forex traders with open positions should always be in position to react to NFP data releases. The danger in simply doing nothing about your position is that a sudden increase in volatility can lead to bigger spreads and margin calls.

Some traders will consider closing all active positions before an NFP release and begin a new pattern of trades after the data is released. Some traders may avoid trading during these releases altogether as to do so would not sit within their risk appetite.

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The immediate action tends to be unpredictable as scalpers – traders who look for constant opportunities to lock in multiple short-term trades – enter the fray in a fastest-finger race.

It takes a while for currency pairs to start moving in more typical patterns and it is at this point that a wider pool of traders may l look to get involved.

Is there a reliable strategy to use when reacting to NFP data?

The immediate action tends to be unpredictable as scalpers – traders who look for constant opportunities to lock in multiple short-term trades – enter the fray in a fastest-finger race.

It takes a while for currency pairs to start moving in more typical patterns and it is at this point that a wider pool of traders may l look to get involved.

Is there a reliable strategy to use when reacting to NFP data?

As with any aspect of currency trading, it is important to appreciate that no strategy is watertight when it comes to seeking trading opportunities from NFP data.

With that rider in play, one strategy that many advisers and traders agree on is what is known as a pullback strategy: it is considered prudent to wait for a currency pair to retrace before entering a trade.

Let’s take a historical example: the March 2019 NFP Report. The data that day revealed a highly disappointing 20,000 new jobs against a prediction of 180,000. The expectation for traders was that the US dollar would depreciate, so when trading EUR/USD (buying euros and simultaneously selling dollars) a buy trade would be recommended.

The issue is timing. Let’s look at the chart below which shows five-minute candles. The narrow part of the candle shows the extremities of each five-minute trading period while the wider part shows where it started and finished.

Five Minute Candles Chart

Source: FOREX.com

What is the best time to trade the NFP data?

The graph spikes up rapidly, way past the range of a “normal” candle but falls back equally quickly and in fact comes down to a level BELOW where it was BEFORE traders could see the data they’d been waiting for.

It is at this point that a pullback strategy would suggest a buy trade should be made in the expectation that the graph is ready to move back into positive territory. And indeed, that is exactly what happens – look at the big green candle representing the next five-minute period.

Of course, the next issue becomes when to sell the position and possibly lock in the profit. It’s a quandary that can often be solved by setting a take profit order which can automatically settle the trade in its own time.

With that said, traders should be aware about the potential for markets to gap. It’s something that can happen after the release of news data.

Market gaps can cause slippage which may affect stop and limit orders – meaning they will be executed at a different price from that requested.

A warning: pullback strategies do not always work

Trading news releases can be a profitable tactic, but it comes with a warning attached. As we have outlined, trading the NFP data at the moment of release is particularly risk-adjacent which is why many traders prefer to wait for the wildest swings to subside. That’s also when there is less likelihood for gapping and slippage to occur.

The more patient traders are attempting to capitalize on the underlying market move after the more speculative operators have waded in. But even then, there will be times that this strategy does not work. In that scenario, just as a take-profit order would ensure a positive result in the event that the strategy does work, a stop-loss order would be a prudent option to help limit the effect of a negative result.

Trading on news data: the broader picture

The NFP data is one of the most important regular news releases that affects trading, and seasoned traders ink those monthly dates into their diaries.

However, there are plenty of other opportunities created by news. By reading FOREX.com market insight pages, keeping across our company Twitter feed, plus the personal accounts of our in-house analysts such as Matt Weller, you can remain well informed about future events and how markets might shape in response to them.

Forex trading involves significant risk of loss and is not suitable for all traders. Even the best traders do not win all the time. The key is to keep your average losses smaller than your average gains, and to never allow your strategy to be impaired by emotional calls.

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