Today we will talk about a few important things: what Nonfarm Payrolls is, what you can expect from the market during this news release, and also discuss a simple strategy for this period that works 100% of the time.
Nonfarm Payrolls in Details
So what are Nonfarm Payrolls or NFP? It’s the number of new workers employed in nonfarm or non-agricultural sectors, which include about 500 sectors, such as trade, construction, medicine, finance, etc.
Data is collected on the basis of written paychecks for labor compensation. The numbers are compared with the previous month. Significant changes in indicators (100-200 thousand of new employees) have a high impact on currency pairs, including the US dollar and gold. The release of Nonfarm Payrolls numbers, as a rule, increases the market volatility for several hours.
NFP data can be found on any economic calendar. The indicators are published on a monthly basis on the first Friday at 12:30 or 13:30 GMT. The calendar contains data from the previous and current months, as well as forecasts.
The Reaction of the Forex Market to Nonfarm Payrolls
Often, traders begin to actively open positions before the actual news release. This may lead to unexpected price changes. With a timely response to NFP data, you can distinguish two main scenarios:
- If the new indicators match the previous data or the forecasts, then the market volatility will increase but there will be no sharp movements in prices.
- A significant change in indicators can cause significant price movements and even a reversal of the main trend.
The increase in the number of jobs indicates the growth of the economy in the country, which has a beneficial effect on the US dollar. A decrease in indicators, respectively, can cause a drop in the USD rate.
As a rule, during the release of Nonfarm Payrolls data, you can expect the following changes in quotes:
- The most common situation is a change in 50-60 points
- A rarer scenario is a change in 100 points
- An extremely rare, but statistically possible option is a sharp movement in 100-200 points
How to Trade During Nonfarm Payrolls Release
Just like trading during a release of any other important news, traders adhere to three main courses:
- Opening positions prior to the news release based on forecasts from the economic calendar.
- Trading based on new numbers right after the actual news release. As a rule, traders place pending orders in both directions with Take Profit at 20-50 points from the entry point. When one of the orders is triggered, the second is canceled.
- Trading on the price action sometime after the news release. These traders, as a rule, wait for the end of the major price movements and open positions when the market has already decided on the direction.
Unfortunately, the second method, which is one of the most commonly used, carries too many risks. It seems quite thought-through at first glance but way too often both orders are closed at a loss.
In addition, trading during the release of significant news carries additional risks:
- Order execution failure
- Trading terminal freezes
- Overloading of brokers’ servers due to a large number of orders
You probably wonder how then to protect your capital from losses during the Nonfarm Payrolls release. There is one fail-safe strategy - complete avoiding trading during this period.
Here are some tips for behavior at this time:
- If you are an intraday trader, close all your trades at least an hour before the news release.
- If you are a long-term trader and do not want to close current positions, then move your Stop Loss levels taking into account the fact that the market might make jumps of 50-200 points.
- Unless you trade solely on price actions, you can return to trading a few hours after the NFP release.
Obviously, trading on important news can bring huge profits. However, you will rely solely on luck, as it is simply impossible to predict the market behavior during these periods. This is especially true for significant news such as Nonfarm Payrolls. That is why the best solution would be to avoid trading during this period.
Please note that spikes in the US dollar can even affect other currencies such as the euro. Therefore, some traders avoid trading during NFP even on pairs such as EURJPY. It is not necessary to close all your transactions on such currency pairs, but you should always monitor your open positions during those periods.