The Non-Farm Payroll (NFP) report can be one of the most profitable strategies for traders, if you follow a few essential tips. The Non-Farm Payroll report reflects the change in the number of employees in the US economy. What this means is that there is a strong correlation between higher NFP numbers and a stronger Dollar. This is where the trading opportunity presents itself. We minimize risk by relying on a historically and statistically strong correlation between the NFP and the USD.
What Is The NFP And Why Is It Important For Traders?
The report is published on the first Friday of every month just one hour before market opening (08:30 am New York EST) by the U.S. Bureau of Labour Statistics. Nonfarm payroll is a term used in the U.S. to refer to any job except for farm workers and a few other smaller categories. That’s where the name Non-Farm Payroll comes from.
Many traders in the know all over the world consider NFP to be the most important news source of the month. Some even only trade the NFP! The financial assets affected by the NFP data include the US dollar, equities, crude oil (WTI) and gold (GC). NFP offers great trading opportunities for gold, crude oil, and Forex pair trading. A number of trading instruments are used to trade the NFP, and these tools use a combination of derivatives and Binary Options to double or triple the movement of the relative underlying asset or their track index. Always be aware of the risk in using leveraged positions and never trade with money you cannot afford to lose, but if you’re reading this blog, you’re probably a savvy investor that knows that already!
Where traders get an edge in trading news reports such as the NFP, is when the forecasted or estimated numbers are compared to the actual final report. The difference between the expected and the actual, compared to previous results, is what makes the market move. When the actual figures are higher or lower than expected, it surprises people, and that makes them react. That reaction causes the market to spike or drop.
Trading contracts based on the news is a relatively straightforward and effective strategy. To make this trading strategy work for you, traders need to turn to the calendar of macroeconomic statistics and base their trading decisions on important events that have a high chance of affecting the market in a predictable way.
Pro Tip #1
The NFP influence on the market is short-lived, maybe an hour or two, four at most. The reason for this is because it is a knee jerk reaction to the actual vs. anticipated numbers. After a few hours the market has absorbed the shock and trading continues as usual. This means you shouldn’t enter long-term trades based on the NFP. Take your trade, make your money and get out.
Pro Tip #2
Watch out for the bounce! The NFP often makes the market spike up or drop suddenly, and then almost immediately recover that lost ground again. You have to be aware of this or else you could get stopped out if you’re trading Forex in the traditional way. There is a great way to avoid getting stopped out, and I’ll share that in bit.
Pro Tip #3
Usually when the actual NFP figures differ a lot from the forecasted numbers, we expect the market to move in a certain direction. However, you must also take the previous actual figure and compare it to the current actual since it can dampen or amplify the market reaction. In other words, if the NFP is lower than anticipated, but it is still higher than the previous month, the market might not respond a lot (bad news + good news = meh). Conversely, if the figures are lower than both the expected and previous report, the reaction can be huge!
How To Not Get Stopped Out On Trading The NFP
There is no magic trick, but rather a different way of trading. With regular Forex trading, the problem is that if the market moves significantly against you (like when trading the wrong side of the NFP), you can get stopped out, or worse, end up owing more than the total of your broker account. If this is a shock to you, read up on it and make sure your broker promises to trigger your stop loss levels upon entry, not later. With Binary Options, your trading risk is entirely limited to the amount you placed on the trade. Read that again. No margin calls, slippage or stop losses that take you out of the market.
The trade-off is that you have to pick a time-frame at which your trade will expire. If you estimated that the Dollar was going to go up based on strong NFP numbers, and you’re right, you get a set return rate, usually between 70% to 85%. Meaning if you put $100 on the trade, you get $185 for a 85% return. If you are wrong, you lose the $100, but even if the market moves a further 100 pips or more against you, your risk is limited to your investment amount for that trade.
Unlike any other trading methodology, incorporating binary options in your NFP trading plans will allow for a limited risk and high reward. This is because your total risk on any particular trade is limited to that trade, and you have a set return that is known before you enter the trade. This allows you to plan your trades and your exposure to the market. For the high volatility NFP trading that is influenced by market news reports.
As mentioned above the Non-farm payroll figures are released on the first Friday of each month at 08:30 am New York EST. You can get the data on NFP at https://www.investing.com/economic-calendar/nonfarm-payrolls
As shown in the picture the number of employees in US non-farm sector has changed by 222,000 in comparison with the previous month.
The forecast for the current month is 183,000.
Note that the number of the previous month was updated after it was initially published. The Bureau has recalculated the number of employees, this happens sometimes. If the forecast turns out to be correct, the EUR/USD pair will rise, as the dollar will go down. “If the economy is adding jobs at a healthy pace, interest rates may move higher. Higher interest rates are attractive to foreign investors, increasing interest in demand for the U.S. dollar. The opposite is also true, with job losses having the potential to push interest rates lower and weaken demand for the dollar”. (Investopedia)
We enter the market for a 10 minute period, which gives us time to bail out if needed.
As seen on the picture the current change has dropped, but not in the forecasted range. So now we have a choice, shall we invest on the rise or decrease of EUR/USD pair? As we see, that the change is closer to the previous month index, which we consider a positive signal (we also take into account the recalculation of 222,000 to 231,000). Therefore, we will invest in a decrease of EUR/USD, and therefore a rise in the USD.