In this article, we will look at what the Non-Pharm Peerrolls report is, when it comes out, what data it contains and how to take it into account in Forex trading.
Non Farm (NFP) is an abbreviation for the English name of the Non-Farm Payroll report - a report on employment in the non-agricultural sector. Non-farm reflects American employment in construction, manufacturing, and service establishments, excluding those employed in agriculture, household workers, and government and non-profit organizations. This is an extremely important statistical and economic indicator published each month by the US Department of Labor as part of its overall labor market report. Data for the NFP report is collected, analyzed and published by the U.S. Department of Labor and provides a financial and economic picture of the labor market from the perspective of various U.S. companies and manufacturers.
What is NFP
The Non Farm Payroll Index is an indicator of the state of the labor market in the United States. Among other economic indices, NFP ranks second in importance. The indicator indicates how many vacancies were created or eliminated over the past month. Agricultural enterprises are not taken into account when calculating.
Nonfarm shows the unemployment rate in the state. The higher the number, the more people are employed. If a trader takes this economic indicator into account in his work, he gets the opportunity to make a transaction that brings a monthly profit.
Over the past 30 years, the best year for the American economy was 1994, during which about 4 million jobs were added to the labor market. The year 2009 turned out to be the most unsuccessful. That year, more than 5 million unemployed citizens of working age were registered in the United States.
When does non-farm news come out?
On the first Friday of the new month at 15.30 Moscow time, a report containing information for the previous month is published. You can also obtain the necessary data on the website of the brokerage agency with which the individual cooperates.
A decision to carry out transactions should be made only after a speech by the head of the Federal Reserve System (FRS) of the United States. The head of this organization indicates the reason for changes in the indicator.
If the head of the System indicates an increase in the number of jobs, an increase in the dollar exchange rate should be predicted. After reports of growing unemployment, we should expect a weakening of the national currency.
How is the indicator calculated?
Non-farm passwords are calculated based on job vacancy information provided by American companies. Organizations whose activities are related to agriculture are not required to submit information. To create Non Farm Payrol, only information about newly created, and not about vacant jobs, is used.
At the second stage of index formation, information about persons receiving unemployment benefits is collected. The information is compared with the indicators of the previous month. In his report, the head of the Federal Reserve also provides additional information, such as average wages and the number of hours worked per week.
You can learn about the changes that have occurred over the month not only from the official’s report. Traders receive information from the calendar of macroeconomic indicators. Experienced foreign exchange market workers take into account indicators from previous years.
By comparing statistical data for different periods, patterns of economic development can be identified. For example, during the summer months the number of jobs in the tourism industry increases.
Salary is a key component
More work can also increase wages. This is very important to the Federal Reserve, as wage increases are one of the key elements the Fed monitors to determine whether they need to increase or decrease interest rates. The Fed has a dual mandate in controlling monetary policy.
While there are many economic indicators, such as personal spending and retail sales, as well as the Consumer Price Index and PCE, that can change the movement of capital markets, the non-farm report is the most significant because it reflects sentiment, inflation and potential growth all at once.
How are the NFP labor market and the dollar exchange rate related?
The Federal Reserve's primary mission is to provide jobs for the citizens of the United States. If a country has a low unemployment rate, the state becomes attractive to foreign investment. The inability to provide the working population with work indicates economic degradation. This will lead to an outflow of investors and an even greater increase in unemployment.
As new jobs become available, interest rates begin to rise. The state is tightening economic policy. If companies start laying off staff, interest rates go down. During the 2009 crisis, the System was forced to reduce the rate to 0%. A gradual increase began after the situation on the labor market normalized.
Why is the release date on Friday?
Friday is the last working day on the currency exchange. If the Nonfarm Payrolls indicator deviates significantly from the predicted indicator, the trader will be able to use the weekend to develop a plan for his further actions.
The head of the Fed reads out the report a few hours before the close of trading on the stock exchange. Practice shows that this technique does not allow stock market panic. Late receipt of information does not allow the most enterprising traders to receive excess profits, which will lead to large losses for their colleagues. Investors in the American economy will not have time to withdraw their investments, guided only by emotional shock.
To obtain objective information before the report is published, a trader can use the ISM indicator, which is also called the consumer confidence index. Information for the formation of this indicator is provided by the University of Michigan.
If the indicator decreases, it indicates a future increase in unemployment. An increase in the indicator predicts an increase in the number of jobs.
How to read a calendar
Before trading on the foreign exchange market taking into account the Nonfarm Payrolls indicator, you need to learn how to interpret the meanings of the economic calendar presented on the broker’s website.
The report contains 4 points:
- Factual information.
- Forecast.
- Previous indicators.
- The reporting month.
For example, in the first column the figure is 156 thousand. In the column with previous information the figure is 178 thousand. According to forecasts, the number of jobs was supposed to increase by 10 thousand. But American companies needed more employees.
Such information predicts economic growth and the strengthening of the American national currency. If the figure in the first column is less than the figure for the previous month, the dollar begins to fall in price.
When planning transactions, you must take into account that 5-6 hours after the publication of news, prices may return to their previous level.
NFP for traders
Often, traders do not dare to trade during the publication of news and close existing positions during new news. Why does this happen? The fact is that during such periods the market is very volatile. In this regard, there is a huge risk of working in the negative. However, you can also get maximum profit. How can you get maximum profit? Want to learn how to trade using economic information? Please read the guide that we have prepared for you.
Which currency pairs to choose for trading at the time of news release
After the news comes out, experienced traders choose to trade:
EUR/USD;- GBP/USD;
- USD/JPY;
- USD/CHF;
- USD/CAD;
- AUD/USD.
Not only currency pairs, but also instruments designed to work with cryptocurrencies and metals react to the report of the head of the Federal Reserve. Each pair includes an American dollar. Exceptions include cross pairs, such as euro/yen. In this case, the exchange rates of both currencies are also recalculated in USD.
The best options for trading on NFP are those with the lowest volatility. Such pairs are among the most predictable. Risks during the transaction will be low. Most traders only work with the EUR/USD pair. Its volatility often does not exceed 100 points per day.
If there is a price jump, the consequences may be as follows:
- Change or confirmation of trend. When confirmed, the trader receives a high profit from the transaction.
- Quote transfer. In this case, a transition to a range that is opposite to the current trend is possible.
Using Options
Currency options are financial instruments that can have unlimited upside potential but limit the risk of a bad trade.
Call options are the right, but not the obligation, to buy a currency pair at a fixed strike price on or before a specific date. A put option is the right, but not the obligation, to sell a currency pair at a fixed strike price on or before a specified date. For this right, you pay a certain fee, that is, the maximum amount you can lose if the deal goes against you.
To trade the non-farm report, some traders prefer to use short-term options.
For example, the option will pay the investor if USD/JPY is above the current price within the next 60 minutes. If you think the payroll number will be higher than expected, you can limit your risk by purchasing a USD/JPY call option that expires shortly after the report is released. The opposite is true if you think the number will be less than expected, in which case you can purchase a put option.
Manual and automatic trading on NFP
There are 2 different ways to trade on Nonfarm Payrolls. The first of them, manual, is based on fundamental analysis. It is carried out taking into account financial news for the past month. The trader must independently obtain information from several reliable sources. The method is suitable for those who have experience in stock trading.
The second (automatic) method involves placing pending orders to the right and left of the current position. This trading option attracts the opportunity to reduce your participation in transactions to a minimum.
However, when using it you may encounter some difficulties:
- The order may be affected by a false breakout. In this case, one transaction will bring profit and the other will bring loss. It may take a trader at least a week to get out of this situation.
- Buy Stop and Sell Stop orders can be opened at the first available price indicator. However, reacting to information that appears immediately after the news is published is dangerous.
Both methods have both advantages and disadvantages that lead to losses. For this reason, it is recommended to combine manual and automated trading.
- To automatically place orders, we suggest you DOWNLOAD for free - Universal trailing stop for trading on news (1st video of 3):
Composition of US jobs data
The US employment report consists of several important data points.
As an example, below is an excerpt from our economic calendar.
As you can see, the employment report contains quite a lot of data. Some are more important than others.
The most important ones, which we will discuss in more detail below:
- Non-Farm Payrolls
- Share of labor force in total population
- Unemployment rate
Most traders only look at employment data. It is often frustrating when markets seem to react irrationally with these releases.
However, the basics of fundamental analysis teach us that some other data in a report can be equally important.
A great example of this is the labor force weight and unemployment rate. Both of these can also cause big moves in the markets.
Change in US nonfarm payroll (NFP)
The first and most unstable reaction usually occurs with NFP. The reason for this is twofold.
Firstly, it is one of the most traded and expected indicators in the Forex market. This means that a large number of market participants are actively trading on this event.
As a result, a huge number of orders are placed before and after the release. High order volume often leads to high volatility following an announcement.
Second, large differences between actual and expected values can cause markets to react strongly. With so many orders, a large deviation in the numbers usually leads to significant price changes.
Employment is a very important part of the economy. Thus, if the actual numbers differ sharply from the consensus, this could change monetary policy. This could cause very volatile reactions in the markets. According to Wikipedia, the US is the largest economy in the world. Any changes in its economic outlook will have a major impact on the markets.
Trading strategies at the time of news release
After the Nonfarm Payrolls indicator is published, the trader must choose a trading strategy in the foreign exchange market.
Novice stock exchange employees need to be prepared for “slippage,” which is possible in the first few minutes after new information is made public. Expecting to buy or sell assets at the same price, very often a trader spends more than planned or suffers losses. The problem occurs due to the heavy load on the currency exchange server and the lack of prices to open your transaction.
The importance of technical analysis
The mistake that novice traders make before opening a trade is to take into account only fundamental analysis. However, it is also necessary to take into account the technical one. Such a mistake can lead to opening an unprofitable trade or losing profits. When analyzing nonfarm news, it is also necessary to take into account general trends in the global market.
To conduct a profitable transaction, you should set up Forex pending orders, which will help you purchase or sell currency at the required cost. Novice traders decide to carry out a transaction immediately after receiving information from the Fed.
It is necessary to refrain from carrying out operations within the first hour after the news is published. During this period, currency prices fall into the oversold or overbought zone. Graph readings may be biased.
The essence of news-based strategy
Traders use a large number of news-based strategies.
The following trading techniques are used most often:
- A deal is opened only if the figure from the actual data column exceeds not only the figure for the previous month, but also the predicted number of vacancies.
- Haste is undesirable, but it is permissible to start trading within 5 minutes after the news is released. During this time, the first candle will have time to form. It is recommended to enter into transactions on a five-minute time frame. The candle should be long and bullish, with a small wick.
- The ratio of stop loss and take profit should be 1:2 or more. In this case, the take profit is set at the level of the closest significant maximum.
- After completing the task, it is permissible to move the stop loss in a positive direction. In this way, asset transactions can be protected from losses. The trader then continues working.
These techniques are used when opening a transaction to sell the US dollar. Moreover, all 3 main indicators of the economic calendar must be negative (showing a decline).
Trading strategy by levels
MT4 is considered the best terminal for chart research. Trading without a terminal is possible if the web platform allows the construction of horizontal lines. The method involves using the US dollar/Japanese yen currency pair or another with the dollar. You need to set a five-minute timeframe.
A few minutes before the report is published, you should draw 2 horizontal lines, departing from the mark indicating the current price 5-10 points down and up. After the report is published, the trader waits for a new indicator to appear outside the marked lines and a deal is opened automatically using pending orders. The operation lasts up to 20 minutes.
After this, the deal is closed manually, using profit or trailing stop. The strategy does not require fundamental analysis. It is recommended for novice traders to apply this principle, but with caution, since orders may not be opened at the stated price due to slippage.
- Here is my experience of trading on news using a trailing stop:
Wait for the dust to settle
Stocks, interest rates and currency pairs tend to fluctuate wildly when actual non-pharma reports differ from what economists expect.
Most professional traders know what the market expects. When the Bureau of Labor Statistics releases this number, prices can quickly move to new trading ranges if expectations differ significantly from the actual number. At this point, traders must choose the most appropriate action strategy.
NFP data results can help you determine or confirm a specific direction for a currency pair. For example, if you are already bullish on the dollar and the market expects the data to be 100,000, but instead of the actual release it shows 200,000, the dollar is likely to gain traction. You can use this information to further strengthen your trading conviction and find better market entries once the initial volatility begins to level off.
