Hello Forex Traders!
The NFP is around the corner again! This is always an exciting event in my opinion, even though I never was (nor will be) a news event trader. To me, the NFP event is something similar to a holiday feeling because of the anticipation of exciting times ahead. Do you have the same?
Price almost always responds in a spectacular fashion to the release of the figures and you can sense the drama in the air. Emotions are flying around as the currency pairs spike up and down. Some traders are winning a fortune, others are losing their shirt. This type of price movement is not for the faint hearted and causes tremendous turmoil. In some cases price resembles closely the movement of a roller coaster as it whirls down and up in a matter of minutes or even within a blink of an eye. Yet at the end of the day, the only thing which remains is a daily candle. All the emotions and movement still translate into a daily candle, just as the one before and after NFP.
NFP surely is a separate type of trading on its own right and this article will provide more guidance on how to trade the NFP. Usually Tony discusses NFP related matters but this time around I wanted to share my 2 cents as well. Before we do that, we are going to cover the basics of the NFP, discuss the importance of NFP for different types of traders, discuss this month’s NFP figures and strategy, and then explain a methodology how to trade the actual NFP.
Just to cover the details: NFP is the Non-Farm Employment Change and it calculates the total number of paid U.S. workers of any business but excludes government employees, private household employees, farm employees, and employees of non-profit organizations (to individuals). It accounts for +/-80% of the work force who produce the entire GDP of the U.S. and is a statistic researched, recorded, and reported by the U.S. Bureau of Labor Statistics and is released on every first Friday of the month.
The unemployment rate indicates the percentage of the total labor force that is unemployed but actively seeking employment and willing to work.
These two news events are the biggest and most volatile news releases in the Forex market. Nothing matches a day like today. The news events are vital for policy makers, economists, traders, business owners, investors, etc to decipher the current state of the economy and predict future levels of economic activity.
a) If the NFP is expanding, this is an indication of economic growth. Economic growth leads to potential inflation, which is followed by an increase of interest rates to compensate inflationary pressures, which in turn makes the currency more attractive and competitive versus other currencies.
b) If the NFP is contracting, this is an indication of economic decrease and has opposite affect compared to the above, which makes the currency less attractive (lower interest rates, quantitative easing).
NFP IMPACT ON FOREX TRADING
Our ultimate guide on how to trade NFP is continuing with a series of questions to help explain the impact NFP has on Forex trading.
QUESTION 1) How do we interpret the NFP figure itself?
Traders and other stake holders are comparing the actual NFP figure to the expected NFP figure.
a) If actual data comes in lower than economist’s estimates – USD weakness expected / short USD
b) If actual data comes in higher than economist’s estimates – USD strength expected / long USD
QUESTION 2) What currency pairs to trade?
Most often the best currency pairs to trade a NFP release are the majors: EURUSD, USDJPY or GBPUSD.
QUESTION 3) Do we want to trade NFP?
It depends on what type of trader you are and how risk averse you are.
The short and simple answer is: NFP is good for scalpers and long-term traders and not recommendable for intra-day traders picking 1 position a day (using 15min-1 hour time frames).
1) Technical traders: uses technical analysis for decision making process. This trader often avoids trading on NFP days. Contrary to other news events the impacts of the NFP are so heavy that typical trading comes to a halt. This is ok: remember that the goal of a trader is not to catch every single piece of price action. That is why we have a trading plan which filters price action and allows us to focus on trade setups with positive expected returns. There are some differences depending on which time frames you use and what type of trader you are (know your self):
- Intra-day trader: very difficult to trade due to quietness before NFP release and volatility after it. Usually stop levels are not safe.
- Swing trader: difficult but doable. A trader using 4 hour or day charts can take long-term positions if a wide enough stop loss is used to survive the volatility and if a good major turning spot is identified.
The NFP can be the beginning of a new direction and trend so for swing traders it can be important to be active and aware of that.
- Position trader: chances of a trade occurring during the day are small, most of the time this trader is an end of day trader anyhow.
2) Fundamental traders: the floor is yours / it’s your show.
3) News event traders: the floor is yours / it’s your show.
4) Scalpers: the floor is yours / it’s your show.
QUESTION 4) Can everyone trade everything during NFP?
No. It also depends on which type of movement during the NFP:
a) 1st movement à Institutions. Typically the first reaction occurs so fast that is only traded by institutional traders that have access to the fastest information and technology as the reaction to the news is within a split second. Price can jump so fast that it changes within the blink of an eye.
b) 2nd movement à open to all. The currency has moved up / down and maybe even both for a few minutes. After the currency settles down and pauses for a few minutes, a trader can evaluate the NFP released figures versus expected, compare that to price movements and technical analysis and judge whether the NFP trading can make sense.
AUGUST 2013 NFP
I am curious, especially this month, to find out the direction of the U.S. economy. The news release is due at 8.30am EST time.
a) Is the NFP figure and unemployment rate decreasing, increasing or stable?
b) How will this affect the U.S. economy and the world economy?
c) How will it affect the FED’s accommodative policy?
Tons of questions as you can see. And the NFP is great a measurement to provide answers to these questions. What do you think? Write us down below!!!
Here are the key figures for NFP.
Previous NFP of July: 195 K
Forecast NFP for August: 184 K
Deviation for trading: anything more or less than +/- 50-70 K
Here are the key figures for unemployment rate.
Previous unemployment rate of July: 7.6%
Forecast unemployment rate for August: 7.5%
Deviation for trading: 0.1%
Here are the ideas for trading the NFP.
Look to BUY USD when unemployment rate is below 7.5% and NFP is above 234-254 K;
Look to SELL USD when unemployment rate is above 7.5/7.6% and NFP is below 134-114 K;
If numbers are conflicting, the best is to wait for reaction of the market.
What is your NFP trading plan? Write us down below!
NFP STRATEGY FOR FOREX
Now we are going to discuss how a NFP strategy for the Forex market could look like. Please be aware that it is crucial for every trader to do their own demo testing, back testing, paper testing, etc before trading live. Past results do not guarantee similar outcomes in the future.
There are some advantages of trading the NFP:
1) NFP is very volatile;
2) Provides opportunity to exploit fake outs;
3) Quick in and out to grab pips;
There are disadvantages as well:
1) NFP is very volatile;
2) There could be spikes in both directions – never straddle the market;
3) Due to emotions in this environment, key levels have less influence and market can over extend in a direction and then reverse;
4) Stop loss size can be larger and might not be respected (depending on broker).
Here is a method how a Forex trader could trade the NFP:
- The NFP figure causes the price to spike in a direction (up or down is irrelevant).
- The price continues up or down for a minute or a couple of minutes and then pauses without breaking the new extreme (high or low).
- Wait for a small pullback.
- Conservative traders would enter the trade 1 pip above or below the new extreme (high or low).
- Aggressive traders would trade the retracement.
- Stop loss 1 pip on the opposite fractal.
a) Target 1:1 r:r
b) Next major resistance or support
c) Time filter: trade should not take more than 20-30 minutes (20-30 bars of 1 minute)
Be careful though. If there is not enough momentum or deviation in the NFP release, the market could quiet down after the initial reaction. In that case there would be not much trading left to do. The bigger the deviation between expected and released numbers, the higher the chance that the market will maintain its volatility – even after the first reaction which is seen in the first minutes.
As always, Good And Safe Trading today and thank you for reading & sharing this article!
Hope you enjoyed this article on NFP trading in the Forex market!
Please write down below what you expect of today’s NFP? Thanks!
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