Why Non Farm Payrolls are Critical for Forex Traders

By
TradersDNA

One of the most important events in the economic calendar for forex traders is the release of the U.S. non-farm payroll (NFP) report. This report, which is one of the key economic indicators for the United States, represents the total number of people in paid employment, excluding government employees, farm employees, employees of nonprofit organisations and private household employees.

nonfarmThe release of this report, which occurs on the first Friday of the month at 8.30am E.S.T. almost always causes large price movements in the forex market, and as a result it is widely anticipated among analysts, funds, traders, and investors. Because of this, it frequently causes big price swings, as you can see in the diagram opposite, even if the number is broadly in line with forecasts. Here, we will show you how to trade this move without getting wiped out by the massive volatility it can generate.

A Strategy for Trading the NFP

Due to the irrational volatility they can create, trading news releases such as the NFP tends to be quite a high-risk activity, but if you can pull it off, it can be very profitable. The key is to wait for the big price swings that occur in the minutes after the announcement to subside, and try to capture the rational price movements that follow them. The release of the NFP almost always guarantees that a tradable move following the announcement, but it is very difficult to anticipate the direction that this will take beforehand. Therefore, it is better to wait and see how the market is reacting before making a move, and try to capitalise on this movement.

gbpusd2Generally speaking, the release of the NFP has a marked effect on the prices of all the major currency pairs, but the effect tends to be particularly pronounced on the GBP/USD. The strategy that we are going to use can be traded off five or fifteen minute charts, and due to the fact that signals will differ between these charts, it is best to stick with one or the other once you have started using one.

Strategy Guidelines

  • Do not trade during the first bar after the NFP report is released. In the case of the 15-minute chart, this covers the time frame between 8.30am and 8.45am.
  • The first bar will have a very wide range due to the high volatility that follows an announcement. Wait for the first inside bar to occur, which is the first bar to be completely within the range of the previous bar – this doesn’t need to be the very next bar after the first.
  • Use the high and low rate of this inside bar to set up trade triggers. When a subsequent bar closes above or below these triggers, you can place a trade in the direction of the breakout, or enter a trade as soon as the bar moves past the high or low point without waiting for the bar to close.
  • Whichever of these two trades you enter, place a 30-pip stop on it.
  • Do not place more than two trades, and don’t re-enter if they both get stopped out. If you are placing a second trade, use the high and low of the inside bar again to set up trade triggers.
  • Most of the time, the move will occur within four hours, so most traders will exit four hours after they enter the trade. If you wish to stay in the trade, use a trailing stop.

Things to Look Out For

Although this strategy has the potential to be very profitable, there are a few things to watch out for. For example, the market might move very aggressively in one direction, but this move could run out of steam before we get to the inside bar signal. Also, the high volatility of the forex market means that price movements could reverse very quickly even after a pattern appears to have been established, so it’s vital to have a stop in place.

Summary

Essentially, the thinking behind this strategy for trading the NFP number revolves around waiting for the inside bar, which can be considered a small consolidation, after the initial volatility expressed in the first bar has faded and the market has chosen a direction. Using a moderate stop to control risk, there is the potential to take a large profit from the big move that usually occurs after the NFP number goes out.

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