How to Trade the NFP Release

The US Non-Farm Payroll (NFP) data, released at 8:30am EST on the first Friday of each month, is possibly the most vital economic release for the financial markets. It not only leads to some of the largest movements in the forex market, but it is also closely watched by pro traders in the stock, futures and options markets. This is because the NFP report doesn’t just include data on non-farm payrolls, it also includes the monthly change in:

• The unemployment rate
• The participation rate in the US labour market
• Private payrolls
• Average hourly earnings and average work week

You might already know that a better-than-expected reading is a positive signal for the US economy and vice versa. Therefore, both the US dollar and stocks benefit from a good report.

Since the NFP report has the largest impact on the forex market, let’s take a look at how to trade forex using this data.

1. Most Popular Currency Pairs to Trade

The NFP impacts currency pairs that include the US dollar the most, so major pairs, such as the GBP/USD, EUR/USD, AUD/USD and USD/JPY see the highest trading volumes before, during and after the release of the report. Minor and exotic forex pairs also tend to see some degree of volatility, although their reaction to the numbers is more difficult to predict.

2. Trading Forex Before the NFP Release

Trading before the report is released requires a short-term strategy that can help you make the most of the rapid price changes that occur in reaction to the numbers. So, the focus here is only on the price action.

Choose your preferred currency pair and then focus only on the price charts. Here’s a step-by-step guide:
Traders choosing to trade before the release have been known to use the 4-hour chart to mark the high and low 15 minutes before the NFP release. They often place the sell order below the low, and buy order above the high on the chart.
As with all trading, risk management is important and with this strategy, the stop loss orders are placed on the opposite side of this high-low range for both short and long orders. Take profit orders would consider a price target equal to the high-low trading range selected at the start. Once the price movements of the NFP release triggers one of the positions, the trader would then cancel the other order.

3. Trading the NFP Fade

If volatility isn’t your cup of tea, it is best to wait for the initial reaction to the NFP numbers to fade before opening a trade. Most often, the initial volatility in forex prices tends to be a knee-jerk reaction, with heightened trading volumes creating a larger impact on prices than warranted. It takes time for the market to digest the data and reassess trading positions. This could lead to a temporary price retracement, which could offer short-term trading opportunities.

Given this expectation of a temporary retracement, one option could be to enter a trade in the opposite direction of the price move that took place during the initial market reaction. This strategy requires patience to wait out the initial intense activity till the market stabilises.

For example, let’s take the USD/JPY pair. The pair soars due to the initial reaction to strong NFP numbers that strengthen the US dollar. At some point, the price will plateau, reaching overbought territory, at least temporarily. This is when most traders will see their take profit and stop loss orders being triggered. As a result, the USD/JPY will begin to fall. In anticipation of this decline, traders could place orders to make the most of the fade.

4. Swing Trading the NFP

The NFP can also be used for long-term trading strategies, given that the numbers tend to impact long-term market trends. The price action tends to follow the direction determined by the NFP data, and can signal whether the month will be bearish or bullish for a given currency pair.

For instance, let’s take EUR/USD. Now, if the pair breaks above its Friday (the day of the NFP release) high on the next trading day, EUR/USD is likely to remain bullish for the month. However, if it breaks below the Friday low the next day, it can be taken as a bearish signal for the month.

So, a simple swing trading strategy could be to place a buy limit order above the Friday high and a sell limit order below the low.

Key Takeaways

• The NFP report has the highest impact on the forex market, especially major currency pairs involving the US dollar.
• Traders can choose to trade the initial reaction to the numbers by using a 4-hour price chart of their chosen currency pair to determine the high-low price range.
• Traders can also wait for the initial reaction to wane before entering the market.
• To trade the fade, traders tend to open a position in the opposite direction of the price move during the initial reaction.
• Swing trading could be a useful longer-term trading strategy for the NFP, since the numbers could determine price direction for the entire month.

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