How To Trade Forex With Non-Farm Payroll

Find out how to trade one of the most influential data releases on the economic calendar: the Non-Farm Payroll.
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Economic Indicators are an essential part of Fundamental Analysis. The markets track economic data points to gauge the health of an economy.

There are hundreds of different indicators. By far, one of the most influential data releases is the Non-Farm Payroll.

According to CME Group, it’s the most volatile economic indicator. For this reason, many market participants actively trade it.

This can lead to some great trading opportunities, if you know what to look for.

In this article, we will discuss the following points:

  • What is Non-Farm Payroll?
  • Breaking down the US jobs report as a whole
  • How to trade Non-Farm Payroll
  • Summary

What Is Non-Farm Payroll?

In simple terms, Non-Farm Payroll measures employment levels in the United States. It measures the amount of jobs that were added or lost during a specific month.

The number excludes jobs in agriculture, government and non-profit sectors. Furthermore, the report is compiled and released by the US Bureau of Labor Statistics.

It is published at 8:30 EST on the first Friday of every month, with a few exceptions.

Why Is The Non-Farm Payroll Important?

The United States has the biggest economy in the world. Additionally, the US Dollar is also the world’s reserve currency.

According to the IMF, the US Dollar is the most widely held currency in Allocated Reserves.

The dollar contributed 64% of total foreign exchange reserves in 2018. As a result, big moves in the US dollar can drastically impact the markets.

This is especially true of Non-Farm Payrolls. According to Investopedia the volatility from NFP can ripple through various asset classes.

Apart from Currencies, it can also affect Equities and Commodity markets. For this reason, the Non-Farm report is a very important report for traders.

Above is an example from 5th December 2018 of how Non-Farm Payroll can affect the markets. In this example, the price spiked up 50 pips in the first 5 minutes after the release.

The reason why it’s so important is that of interest rates. One of the Federal Reserves mandates is maximum sustainable employment in the USA.

This means any big changes in employment could have an impact on US monetary policy.

The Fed’s monetary policy decisions are aimed to reach low levels of unemployment.

Thus, traders watch the NFP closely to anticipate how it might impact interest rates. We mentioned the size of the US Dollar’s influence in the global economy.

When interest rate expectations for the US change, it has global implications. That is why the NFP report is so important.

Breaking Down The US Jobs Report As A Whole

There is more to the Non-Farm Payroll report than just jobs numbers. The US employment report consists of a few essential releases.

As an example, below is an extract from Metastock Xenith’s Economic calendar.

As you can see, the employment report has quite a few data points. Some of them are more important than others.

The most important ones that we will discuss in more detail below are:

Most traders only consider the headline Non-Farm Payroll number. This often causes frustration when the markets seemingly react irrationally with these releases.

This is where Fundamental Analysis comes into play. The Fundamentals teach us that some of the other releases in the report can be equally important.

A great example of this is the Average Earnings and Unemployment rate. Both of them can cause big moves in the markets as well.

Looking at all the data points as a whole is vital. Don’t be blindsided by only considering the headline number alone.

Headline Non-Farm Payrolls

The first and most volatile reaction usually occurs with the Non-Farm Payroll number. The reason for this is twofold.

Firstly, it is one of the most traded and anticipated indicators in the forex markets. This means a big volume of market participants actively trade the event.

As a result, huge amounts of orders are placed before and after the release. The big volume of orders often leads to a lot of volatility after the announcement.

Secondly, large differences between actual and expected numbers can cause frantic markets reactions. With so many orders a big deviation in the numbers usually cause significant moves in the price.

Employment is a very important part of an economy. Employment forms part of many central bank mandates. Some examples are the ECBFederal ReserveRBNZ and the RBA.

So, if actual numbers drastically differ from consensus it can change monetary policy. This can create very volatile reactions in the markets.

According to Wikipedia, the US is the world’s largest economy. Any change in its economic outlook will have a big impact on the markets.

Average Earnings YY

The second and more sustainable moves usually come from Average Earnings numbers.

The Average Earnings track the wage growth of employees in the United States. Thus, it shows whether wages are growing or contracting.

Wage growth is compared on a month-over-month and year-over-year basis. So, why would wage growth have an important impact with NFP releases?

The reason comes down to growth and inflation expectations. When people earn more, they are able to spend more.

Thus, when wage growth accelerates it boost expectations about consumer spending. This is significant given the impact private consumption has on economic growth.

According to Bloomberg, US consumer spending accounts for approximately 70% of GDP.

The opposite of this is also true in terms of falling or contracting wage growth.

Another reason why Average Earnings are important deals with inflation expectations. Some central banks like the ECB and RBA argue that wage growth leads to increased inflation.

As a result, an increase in wages usually raises market expectations for inflation to rise. If the markets think inflation will rise, they assume interest rates may rise as well.

Consequently, this can cause appreciation in the Dollar as markets expect higher rates. This is also the reason why US Equities usually sell off with high wage growth numbers.

The reason for this is that higher interest rates mean higher borrowings costs. Which is bad for company margins.

Unemployment Rate

The other important reading is the Unemployment Rate. This can also dictate the way the market moves after the initial spikes.

The business or economic cycle is very important when it comes to the Unemployment Rate. As a lagging indicator, it means it is a little behind the curve.

So, if the US economy is late in its economic cycle, we would expect a low Unemployment Rate. The opposite of this is also true.

For this reason, the Unemployment Rate is important, but not as crucial as the other two numbers. However, unexpected sudden changes can create a lot of volatility.

How To Interpret Non-Farm Payroll Reports

So, how can we better interpret Non-Farm Payroll releases?

The most important thing is not to get suckered into the headline jobs number. Taking your time to understand the report as a whole is the first step.

Don’t let the massive moves intimidate you by jumping in when you see lots of volatility. Be patient and first evaluate the three important components within the report.

There are a few criteria which will show us when the NFP report is tradable or not. The best buying opportunities occur when all three important data points are positive.

Similarly, the best shorting opportunities occur when all three data points are negative. In addition, the best times to stay out of the market is when the report is mixed.

Also, the overall big picture fundamentals should always be your starting point. For example, apart from the NFP numbers, how is the US economy doing?

If the US economy is in a very late economic cycle the market would expect Non-Farm Payrolls to be high. As a result, a very high print above market expectations might not be as market moving.

This is because the market is expecting good numbers. However, when the US economy is just coming out of a recession the markets won’t expect big beats on jobs numbers.

In such a case, a big beat on the numbers can really cause massive moves in the market. This is because the market was not expecting good numbers.

So, knowing where the economy is fundamentally should always be kept in mind.

Example Of A High Probability Buying Opportunity With NFP

Let us look at a couple of past NFP releases to see how we can interpret the data.

The above example is a textbook buying opportunity for the US Dollar. You will notice that the headline NFP number had a considerable beat versus its forecast.

The market was expecting a print of 191K, but the actual number was 286K. Notice that the print of 286K was higher than the maximum number expected by analysts.

So, in this example the headline Non-Farm Payroll number would be good for a possible buy.

We can also see the Unemployment Rate came in as expected. This is a neutral number so our possible buy idea is still intact.

Now we look at the Average Hourly Earnings numbers. Both the MM and YY numbers came in higher than expected.

Furthermore, the YY number was higher than the maximum number forecasted by analysts. So, as a whole, this NFP report was very positive for the US economy.

As a result, we would expect the US Dollar to appreciate after this release. This would give us the green light to open a buy trade on the USD.

How long a trade like this would be valid is also an important consideration. This would depend on the overall view of the US economy at that time.

For example, if the US economy was doing very well this trade could be held for a longer time. However, if the economy was in a rut it would be best to take it as a short-term trade.

We should always try and trade in line with the big picture fundamentals as much as possible.

Example Of A High Probability Selling Opportunity With NFP

Now, we’ll look at an example of when the NFP report would be a high probability selling opportunity.

From the above example we can see that the headline NFP number came in lower than consensus. However, the print was in line with the market’s minimum and maximum expectations.

In addition, we had big misses on both the Average Hourly Earnings numbers. These were significant misses as they were lower than minimum expectations by analysts.

The Unemployment Rate did have an improvement to 4.1% from 4.2%. Remember, the Unemployment Rate is counter-cyclical.

This means the lower it goes the better. Despite the Unemployment Rate, the report was more negative than positive.

As a result, it could have been a good opportunity to look for a USD sell trade. At this stage, you might be wondering whether this would have been a short or medium-term trade?

This would highly depend upon the bigger fundamental picture of the US economy at that time. If the bigger picture view was solid, this would have been best as a short-term trade.

In contrast, if the view on the US economy was negative, the trade could have been held a bit longer.

Examples Of NFP Reports Which Are Best Not To Be Traded

In this section, we’ll look at examples when it’s best not to trade the NFP report.

In the above example, the headline NFP number had a slight miss of 176K versus 200K. However, the print was in line with the market’s minimum and maximum expectations.

The Unemployment Rate came out as expected so not really a market mover.

Average Hourly Earnings MM had a slight miss to 0.2% versus 0.3% expected. This was still in line with the market’s minimum and maximum forecasts.

The YY number for Average Hourly Earnings also came in as expected. If we take everything into consideration this report came out very mixed.

There was no clear bullish or bearish signal for the USD from this data. So, in this example it would have been better to stay out of any trades.

Remember, we’re looking for the highest probability data. That is the best way to trade this event profitably.

Let’s look at one more example of a mixed report with a bit of a twist.

From the above example, the headline NFP number had a big beat of 325K versus a 200K forecast. Also, the number was higher than the maximum that market analysts expected.

The Unemployment Rate had a slight miss to 4.1% from a prior of 4.0%. So, still within the market’s range of expectations.

Average Hourly Earnings MM also had a slight miss to 0.1%. Even though this was a miss, it was in line with the minimum expectations.

The Average Hourly Earnings YY had a big miss of 2.6% versus a forecast of 2.8%. This was significant as the lowest expected number was 2.7%.

So, we had a big deviation in both the positive and negative direction with this report. This would be a good example of an NFP where it would be best to sit out.

In the next sections we will look at a few possible ways how we can trade the Non-Farm Payrolls.

How To Trade The Non-Farm Payroll Report

The first possible way to trade the NFP report is as a scalper. Due to the volatility of the news release this can be a very volatile method.

The first thing to keep in mind is that the fundamentals should always come first. As discussed above, look for clear bearish or bullish opportunities.

If the data does not give you a clear opportunity rather stay out of any trades.

1. Scalping

The first trading example we will discuss is scalping. As mentioned above, we first use the fundamentals to analyse the data.

In the below example, the fundamentals showed us a possible selling opportunity. Only after this do we look to the charts.

As in the example above, we will drop down to the 1 Minute timeframe for this scalping technique. There can be a few volatile spikes up and down immediately after the release.

For this reason, it’s prudent to wait for the initial reaction to subside before we enter. Wait for the first 1-minute candle to close.

Then, we can draw a Fibonacci retracement from the start to the end of the move. The 38.2, 50.0 and 61.8 Fib levels can all be considered for possible entry locations.

In the example above, we see the price retraced to the 61.8 level before continuing lower. Our Stop Loss should be anchored above or below swing points.

For the Take Profit, we can use the Fibonacci Expansion levels to find possible areas. Above, we had confluence with the 100.0 Fib expansion level and the 1.13500 psychological price level.

2. Day Trading

For Day Trading the same process can be followed as we had with the scalping technique. There are two noticeable differences though.

The first is that we use a higher timeframe like the 15-minute charts. The second is that the trade can stay open a lot longer.

With the scalping method a trade can sometimes be closed within an hour after the release. With the day-trading method a trade might stay open for a couple of trading sessions.

While with the day-trading method, we wait for the initial move higher or lower to pull back. Our ideal entry areas are between the 38.2 and 61.8 Fibonacci Retracement levels.

We used the same 100.0% Fibonacci Expansion level for our Profit Target. With the Stop Loss anchored above the previous swing high.

Now, in both the previous two examples we can see we would have had winning trades. This will not happen every time!

No strategy will ever give you a 100% winning ratio. Having said that, this method should give you a higher probability.

3. Swing Trading

The way we approach the NFP from a swing trading perspective is slightly different.

With the swing trading method, we will be trading on higher timeframes. Anything from the H1 to the Daily.

The big picture fundamentals play a very significant role with this approach. Even before the NFP report comes out we need to know what our fundamental bias is for the US Dollar.

Also, we need to know what the bias is for the currency we want to trade against it.

So, we could have two possible scenarios. The first is that we are bullish on the US Dollar and bearish on the Euro in the longer-term.

Scenario two is that we are bearish on the USD and bullish on the Euro in the longer-term. In the above example, our bias was bullish on the USD and vice versa on the Euro.

This means, our bias for the EURUSD in this example was to the downside. In such a case, if the NFP came out very positive for the USD we could simply open up a sell trade and let it ride.

As this would be in line with our bigger picture fundamentals. However, what happens when the NFP comes out against our longer-term bias like above?

Our strategy for this is to allow the negative NFP report to provide us with a better price to sell the pair. As long as the NFP report did not change our fundamental bias in any way.

Thus, our approach above would be to wait for price to reach the 78.6 % Fibonacci Retracement level and take a short. With a Stop above the previous swing and a target at the 100.0% Fib Expansion level.

The reason why we would take a sell trade in this example is that our big picture bias did not change. The NFP simply gave us a much better price to short the pair.

Summary

In this article we learnt a lot about the Non-Farm Payroll news event. We learnt what it is and how we can properly analyse it.

Importantly, we learnt when an NFP is tradable and when it should be avoided. This alone can save you a lot of money and frustration going forward.

Then, we also discussed several practical ways to trade out of these events. We shared how we can trade NFP from a Scalper, Day-Trader and Swing Trader perspective.

So, how can you get started if you have never traded the NFP before?

1. Find an economic calendar online and note when the NFP is due to be released.

2. Do research about what market analysts are expecting from the release. Read up on investment bank commentaries to gain extra insights.

3. Then, spend time analyzing live NFP reports as they are released. Don’t feel pressured to trade them.

Just analyze them and get a feel for how the markets react to them.

4. Following the event, find out how analysts interpreted the data. This will help you gain understanding of how the market relates to these events.

5. Always protect your account by following proper risk management principles. Especially with volatile risk events like NFP.

We wish you all the best with your Non-Farm Payroll trading.

If you have any questions or comments, feel free to let us know in the comment box below.

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