This Friday (June 1st) it's time again, the Nonfarm Payrolls (NFP) will be announced. But why is this so important to most traders? What do you have to pay attention to and how can you profit from it? We want to explain all this and much more in this article.
What are the NFP?
The NFP show you how many new jobs have been created in the United States (excluding any jobs in the farming industry because farming jobs fluctuate less with the economy).
The NFP numbers are announced on a monthly basis, usually the first Friday of the month, and are highly meaningful to the U.S. economy. As the name suggests, it's about changing all jobs outside agriculture. A positive number indicates economic strength, while a negative number indicates economic weakness. The value of the number always refers to the previous month.
Of course, expectations also play a role and so a positive number is not always positive in its effect. Assuming a number of +150K is expected and the actual number is only 50K, then that's bad.
In the following picture you can see the numbers of the last 10 years:
The number is published by the Bureau of Labor Statistics, and the report provides a wealth of information and other figures.
How do the NFP affect the financial markets?
The chain of effects in theory is quite simple: if the NFP rises, then it means that the economy is growing. This, in turn, signals to the Federal Reserve that the economy may overheat, which in turn creates potential interest rate hike fantasies. This fact leads stock traders to fear that interest rate hikes will lead to lower stock prices.
Unfortunately, one cannot generalize the mechanism of action, as many variables, e.g. current interest rate level, unemployment rate, gross domestic product, financial market stability and some more are immensely important.
Donald Trump and NFP Tweets
The infamous U.S. President loves to retweet NFP data when they are positive:
Excellent Jobs Numbers just released - and I have only just begun. Many job stifling regulations continue to fall. Movement back to USA!— Donald J. Trump (@realDonaldTrump) August 4, 2017
Jobs and job growth are seen key on his political agenda, thereby further increasing the impact of NFP data, even though he not necessarily takes them into account in the careful way recommended above in this article.
NFP are causing fierce market movements
What can be generalized, however, is the statement that the NFP very often lead to violent market movements. In addition to interest rate decisions by the FED, they are considered to be the most influential regular event on the financial markets. Often the movements are not just one way to watch, but it is not uncommon for an asset to rise sharply, only to fall sharply thereafter. This process happens in a few minutes, sometimes even seconds.
Let's look at the impact of the last 3 NFPs in EURUSD on a M30 chart:
It can be clearly seen that the violence is disproportionate to the usual market movements in the EURUSD over the same period.
Another aspect that is dangerous is the very frequent slippage and the rising bid-ask-spread. Faced with these two conditions, the profit must be even greater to compensate for these disadvantages.
For this reason, we warn against exposing positions in assets affected by the NFP when trading the small timeframes (M1, M5).
3 Tips to Trade the Nonfarm Payrolls
As you will probably suspect, there is no holy grail. But there are some useful tips that will help you.
#1 Stay away from the markets
This tip does not seem helpful, but it is. Remember, you can improve your performance by eliminating bad trades. Trading news is a very difficult task and without a clear idea and a well-functioning strategy, you will probably lose more than winning if you want to trade the NFP.
#2 Ride the second wave
As already mentioned, the movements are fierce and a clear direction often only emerges late. Exactly this fact you can use for your trading, by only entering the market, if this direction was formed. Another advantage of this approach is that slippage and spread have returned to normal.
#3 Trade strategies that use swings
There are strategies that use the formation of swings and subsequent countermovements. Tradimo has also developed such a strategy, which can be used in market phases with sharp price movements, called 79%-pullback strategy. Of course, we also have a direct course to trading the NFP.
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