How To Trade The Monthly NFP Report (Profitably)

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One of my favourite points in the month is the release of US Non-farm Payroll (NFP) data. This is probably the economic data release  that Forex traders most widely follow. And this is because it presents an opportunity to make quick pips. For this reason, I want to show you how to trade the monthly NFP report.

To help, I’ll use December 2016’s report as an example. By doing this, you should be able to trade the next NFP release and make some profitable trades.

What Is Non-farm Payroll Data?

Before I explore how to trade the monthly NFP report, it’s vital that you actually understand what the data means. You also need to know how it affects the financial markets and the price of USD.

As you probably know, an economy’s ability to keep unemployment low is one of the primary drivers of growth. For this reason, developed economies periodically attempt to measure he creation of new jobs along with the rate of unemployment for its population. The body which is responsible for doing this in the US is known as the Bureau of Labor Statistics. At the start of every calendar month – the first Friday to be exact – this body publishes an employment report. Within this report are various sub-reports about employment in the US for the preceding month.

One of these sub-reports is the Non-farm Payroll report. It contains the total number of paid US jobs for the preceding month, excluding jobs in certain industries such as farming and non-profits. This number is then used to determine how many new jobs were created or lost from the month before. Below is a graph from the Twitter account of The White House. It shows how many jobs have been added to the US economy month-on-month since 2008.

The total number of new jobs created is seen as a key performance indicator of the US economy. It’s why traders and investors attribute so much significance to the figure.

How To Trade The Monthly NFP Report: Getting To Grips With Forecasts

Ahead of the publication of a monthly NFP report, traders are able to look at a forecast.  This is a big advantage. Why? Because it predicts the number of new job creations for a particular month.

A figure which is higher than its forecast is a positive sign for the US economy and usually causes the price of USD to increase. A figure which falls short of its forecast usually results in a fall in the price of USD. You could consider this when learning how to trade the monthly NFP report.

The below screenshot from ForexFactory shows an example of how these forecasts look on standard economic calendars.

How To Trade The Monthly NFP Report: December

While the correlation between the number of new jobs created and the price of USD may seem simple, making an actual trade that is profitable is a little more nuanced than just reading a headline figure.

To show you what I mean, I thought we’d take a look at how the price of USD moved following the release of the NFP report for December 2016.

Figures from that report show that an extra 156,000 jobs were added to the US economy in December 2016. The number fell from 204,000 new jobs in November 2016 and missed the forecasted figure of 175,000. If you’ve understood this article so far, you would probably assume that the price of USD fell against its major counterparts during the trading session of Friday 6th January. But this didn’t happen – the price of USD actually increased against other major currencies.

The US Dollar Index, which measures the price of USD against an average value of other major currencies, actually reached intraday highs after the publication of December 2016’s NFP report. The index opened Friday’s session at 101.67 and reached a high of 102.29 – reflecting a great opportunity to make pips when backing the USD against other major pairs.

Read Economic Data In Context

So why did this happen? The reason is actually pretty simple – there was additional data within the employment report that compensated for the lower than expected new jobs figure – namely the increase in the annual rate of wage growth, which hit a seven-year high. This is was pretty big news in itself, and cancelled out any negative impact on the price of USD that a smaller than expected job creation reading might have had. It’s also important to remember that unemployment remains historically low in the US. So while the NFP figure missed expectations, the US economy is certainly in a steady phase of growth.

The lesson to take from this to read beyond the headline figure of an NFP report. The number of new jobs created is clearly a major metric to monitor for Forex traders, but it must be read within the context of supporting data, such as unexpected wage growth and unemployment numbers (which are usually picked up instantly by financial news outlets). Just keep the ‘big picture’ in mind when trying to determine how price will move.

Take Action

Using the principles I’ve outlined above, it’s entirely possible to make a profitable start to each and every trading month in 2017. The next NFP report is set to be published on February 3rd 2017. If you haven’t already done so, be sure to mark this down in your diary, as it will certainly present a trading opportunity.

Here’s a summary of what you need to do to make profits:

1. Mark February 3rd 2017 in your calendar/diary as the day when January 2017’s NFP report will be published (13:30 GMT).

2. Monitor the news for job creation forecasts ahead of the data release. You can use an economic calendar like this one.

3. Watch the US Dollar Index upon the NFP announcement at 13:30 GMT, and place a trade that takes advantage of the actual job creation reading (while compensating for any competing economic data) and subsequent USD price movement. Remember, a reading above expectations usually mean an increase in USD price; below expectations, USD price usually falls.

I hope this article is useful for you – I’d love to know if you profited from last week’s NFP report. Please leave a comment below and share your experience with me and other Forex traders.

You can also join my Facebook Group for more trading insights and analysis. It’s completely free to join and is a great place to talk to other traders for feedback or just sharing ideas. I regularly share my own trading insights with this community and share other useful resources, such as student case studies and videos.




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