Home Beginners Guide to NFP trading




What is NFP?


NFP is one of, if not the most, anticipated indicators of economic growth. In a nutshell, the non-farm payroll (NFP) figure is an economic indicator used in the United States economy. What it is and does will be explained in detail in this NFP trading – a beginners guide to trading it.

The release of the NFP generally occurs on the first Friday morning of every month and it shares the number of jobs created in the United States the previous month.

The NFP report gives an indication of the level of economic activity and economic health of the American economy.

The NFP will show employment data in American outside of the following sectors: Agriculture (migrant workers for example), public service, and volunteering jobs.

Along with the NFP they also look at the data on unemployment, which sectors are growing or diminishing in terms of employees, the average number of hours worked, the average hourly earnings, and a few other key employment statistics.

Given that many economies across the globe do business with the United States, and many countries rely on the American consumer for a great deal of their profits, the NFP report also has an influence on many world markets beside the U.S market , and generates a lot of speculation among the world’s traders.



Why is the NFP report so important?


The United States is a consumer-driven economy, and employment growth and wage gains have a direct impact on consumer spend and growth in the country.

Obviously, the more people are working and the more they are earning and more stable their jobs are then the more they will spend on not only necessities but on services and luxuries as well, which fuels the economy.

The non-farm payroll report causes, as stated earlier, the largest movements of rates of any news announcement in the Forex market.

Therefore, all of the Forex world anticipate the NFP number and the directional movement it will cause and this can often cause large swings in the currency rate.


NFP Report flaws


It may surprise you to know, however, that the NFP, is very flawed despite being considered one of the most important reports in the American Economy and one of the most closely watched economic indicators in the Forex market.

To begin with, the NFP is the difference between two estimated figures. The government estimates the number of job losses and the number of job gains and subtracts them and the difference gives the NFP.

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It is far from an exact figure and gets revised not once but twice before it is finalized which means the first figure you hear is often far from accurate, and there is also a large margin of error.


Which assets are affected by the NFP?



How to trade the NFP report


There are two ways to trade the non-farm payrolls report, these are the long-term trend and the near-term news.

By far the most effective way of using the NFP for trading is from the long-term perspective.

Basically, what you are doing is using the NFP to determine or confirm the trend, changes in trend, and major turning points in the market.

If the NFP is trending positively and showing signs of strength such as trending above the 12-month average, then the fundamental trend of the market is bullish.

In this case, it is advisable to follow only bullish signals when they are presented on a price chart.

Price corrections and pull-backs to support levels are often opportune entry points for longer-term style trades.

By longer-term style trades I mean trades you will want to keep open for multiple days, possibly even weeks or months.

The other method of trading the NFP is the short-term news; is the NFP better or worse than expected, or does it confirm or refute market expectations.

The problem with this method is that the NFP doesn’t always get the market wound up enough to produce a move and, because of its flaws, rarely produces a figure that is truly market moving.

In practice, the two techniques bare some similarities.

In order to capitalize on near-term expectations, you need to have a good understanding of the long-term trends and why today’s NFP is more or less important than any other NFP report.

Changes in trend and confirmations of expectation are by far the best signals.

As the NFP Forex publication is often a cause of increased volatility in the currency market, real trading opportunities are present in the markets around this particular event.

NFP trading can be extremely lucrative but also extremely dangerous if the trader does not know exactly what to do and does not follow a well-established and tested plan.


NFP short-term Forex trading strategies


The NFP report generally affects all major currency pairs, but the favourites among traders are the GBP/USD and the EUR/USD.

It is advisable not to trade off the release itself, and even holding trades into the release is not something new traders should be doing.

The most effective strategy for trading the NFP report is to combine both technical and fundamentals analysis and strategies.

Don’t trade around the actual release itself and make sure to close all open positions at least 10 minutes before the release of the NFP report and you don’t want to trade in the minutes following the release either.

You will often see price trading in wide ranges and volatile whipping back and forth for the first minutes after the release and as people begin to react.

That is oftentimes simply just traders executing market orders and stops getting hit. There is usually nothing gained by trading during this time.

In the 30-60 minutes following the release, however, the price will start to move and ideally trend in one direction and you are looking to go with the momentum.

Prior to the release, it is very important to mark out key support and resistance levels on a 30-60 minute chart. Then when price breaks through these levels, you’re able to use them as your entry signal.


That way you are buying strong pairs above key resistance and shorting weak pairs below support, with a fundamental catalyst behind them.

Trading the NFP data release are often dangerous thanks to the rise in volatility and possible widening of spreads.

To combat this, and to avoid getting stopped-out, we recommend using the acceptable leverage, or no leverage in the least.


NFP Forex trading example


EUR/USD – 5min.


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Let’s say that the market expectation was for 160K new jobs to be created in the prior month. The actual result came in below expectations, which was, therefore, negative for the USD.

That would give us an upside bias here in the EUR/USD as we expect the US dollar to weaken against the Euro.

There will usually be some volatility and whipping back and forth on the bar when the NFP report is released. As mentioned, we need to avoid the minutes after the release.

There will usually be a resistance level at some point and in our example, let’s say that it is at 1.040 and so that would be a good level to key off, post the NFP report.

Once price breaks through the 1.040 resistance level on a 5 min chart we are then looking at a possible long entry depending how the momentum continues. As we have our fundamental driver (NFP report) and a key technical level.

As you can see, price first breaks through and then pulls back, tests that support and holds.

When prices close above 1.040 on the pullback, that is a good long entry signal.


NFP trading fictitious example


The following may be a fictitious scenario on how a trader would trade NFPs.


The speculations


It all starts with rumours and speculations which suggest that this Friday’s US non-farm payrolls report is predicted to be the worst ever.

Economists believe that 21 million jobs were lost within the month of April, which might drive the percentage up by 16%, meaning you, as a trader would attempt to stimulate the stock exchange.

Furthermore, the last time the jobless rate was within the double digits was in 1983, just after the 1980s recession.

Historic job losses should drive currencies and equities lower but with everyone trying to find an unsightly report, what impact will it really have?


Where’s the action?


Expectations are one thing, but you must examine the price action because this is what really makes the difference.

Taking a glance at currencies, the persistent sell-off in USD/JPY over the weeks prior tells you that Forex traders have positioned themselves for a weak report.

While dramatic job losses could still drive USD/JPY lower, the sell-off might also be limited if the report isn’t too far off what is expected.

On the opposite hand, equities and ten-year Treasury yields are hovering near one month highs. This suggests that traders in those markets are either looking past April data or aren’t prepared for a weak release.

We’d wish to think that it’s the previous since the evidence of staggering job losses are everywhere but as long as stocks and Treasury yields are up over the past month, even a modestly weaker report could send equities tumbling further.

For Forex trading, this suggests there’s scope for broad gains for the Japanese Yen and Swiss franc and extended losses for USD/JPY.


Hourly earnings; where’s the earnings growth?


A trader has got to keep an eye fixed on the typical hourly earnings because that’s where the large surprise might be.

Economists expect earnings growth to remain steady at 0.4% and rise from 3.1% to 3.3% year on year.

This might be difficult to know considering the widespread reports of companies keeping employees on payroll but cutting their salaries.

If the wage growth turns negative and therefore the remainder of the report is in line, it might be enough to send equities and currencies on a pointy decrease.

Based on the above scenario, a trader’s best plan of action when trading NFPs is to either sell before the report is released then close. Alternatively, the trader could take a less risky route and await the numbers to be released, prices to stabilise and see what becomes the important move of the day.


In conclusion


Now that you have read this guide: NFP trading – a beginners guide to trading it, you should understand that there really are no guarantees when it involves trading the non-farm payrolls.

The volatility involved means your trades can deliver an outsized short-term profit, or on the flipside short-term losses, so make sure to place risk-management orders to help minimise your losses.

If you have never traded the NFPs, start by trading in small amounts, with the acceptable stop-losses in situ to guard your position.

Employment in America is obviously connected to the how much consumer spending a household can do, fuelling the economy.

The more jobs created, the more the level of consumer spending would rise.  The higher the unemployment rate the less consumer spending in the economy.

If there is a continual trend of job creation from month to month then the market would start to anticipate an increase in consumption by American households.

This results in an increase in GDP, therefore giving a psychological and economic boost to the climate of the country.

Forex traders and investors usually look for a positive addition of at least 100,000 jobs per month.  The higher the number above this number will help boost the USD’s gains.

An expected change in payroll figure causes different reactions in the currency markets.

Forex investors will try and gain insight and direction by looking at other factors and related tangent data to gain some sort of direction or insight when there is an expected change in the NFP report.


This includes the unemployment rate and manufacturing payroll reports. If the unemployment rate drops or manufacturing payrolls rise, for example, currency traders might expect a stronger dollar, which is a positive sign for the U.S. economy.

But, on the other hand, if the unemployment rate increases and manufacturing jobs decline, investors will either trade other currencies instead of the U.S. dollar or they may see trade in a way that reflects a weaker dollar.

A lower employment would be detrimental to the economy and should the NFP report show a decline below what was estimated then it may be a sign that the U.S. economy isn’t growing.

This could result in Forex traders favouring higher-yielding currencies against the U.S. dollar.


Frequently Asked Questions


How does NFP affect Forex?

NFP can affect the data that traders rely on to create Forex strategies as well as trading trends. This report can spark and upwards trend or a downwards one, depending on the data.


What time is the NFP released today?

8:30am Eastern Standard Time (USA), every first Friday of the new month.


Which pairs does NFP affect?

Seeing that the NFP is an indication of USA employment it affects all currency pairs that include the US dollar.


How many pips does NFP move?

NFP can be volatile for pips with movements sometimes moving only 50 pips in a few hours, to 300 pips within an hour.