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Learn To Trade the Nonfarm Payrolls Announcements


May 18, 2020
Learn To Trade the Nonfarm Payrolls Announcements

Nonfarm Payroll announcements are crucial in a trader’s economic calendar. The preparation for these announcements is crucial because they create volatility in the trading environment.

What are NonFarm Payrolls?

A Nonfarm Payrolls (NFP) figure is a very fundamental analysis economic indicator used in the United States. This number is a representation of the total number of jobs added or the total number of paid workers in the labour force excluding private household employees, farm employees, nonprofit organisations employees, and government employees.

Why learn to trade NFP releases?

As a Forex trader, you must learn Nonfarm Payrolls releases, the employment statistics, and job loss because they cause significant shifts in the Forex market. Furthermore, it is considered to be among the robust approaches to measuring the vitality of the US economy.

The reports give some insights into future crucial data announcements like GDP figures. If the country’s employment rate goes up, it is indicative of a better economy while the opposite is also true.

As a trader, you need to know how to read the employment statistics. You need to analyse the jobs added or lost to know whether their economy is becoming stronger or there are weaknesses and even possible recession. This comes at a time when approximately 20.5 million US citizens are have exited the labour market. The 20.5 million jobs were lost in the month of April only.

How Total Nonfarm Payrolls Affect Forex Market

economic indicators

Nonfarm Payrolls data is released on a monthly basis. The consistency and time of release are what make nonfarm payrolls a great indicator of the prevailing economic situation.

The Bureau of Labor Statistics, under the department of labour, is charged with the responsibility of conducting an establishment survey to decipher among other things the number of people working and their average hourly earnings then releasing the reports.

The Federal Reserve Bank depends on employment as an indicator of economic performance. For instance, when the unemployment rate is low, there is a tendency of policymakers to have an expansionary monetary policy. The primary goal of this policy is to increase employment rates by increasing economic output.

Therefore, if the rate of unemployment is lower than usual, it is believed that the economy is operating below its potential calling for the need for stimulation by policymakers and many people are experiencing job loss.

The policies often involve lowering interest rates and reducing the demand for the US Dollar.

As a trader, it is only right to be wary of Non- farm payrolls report data because you can easily be stopped-out because of an unexpected increase in volatility. The increase in volatility causes a corresponding increase in spreads, which can also lead to margin calls.

Nonfarm Payrolls Releases Dates

most traded currenciesFarm Payrolls report is often announced at 1.30 PM (UK time) on the first Friday of every month. The payrolls releases are vital in offering deeper month-to-month insights on how the economy is performing.

They also offer a Fundamental Analysis of data in comparison to the total Nonfarm Payrolls in the same month of the previous year.

Understanding these release dates gives you the chance to take a position on the USD and US indices. This will be based on whether you believe the total Nonfarm payrolls will be either below or above expectations.

Fundamental Analysis of NFP Announcements

There are three important ways you can use to analyse the NFP number:

  • Lower NFP figure is bad for the US economy. It only shows the employment situation in the country is worrying and there is a need for some attention. If it shows the number declining below 100, 000 jobs, it is a good indicator that the economy is stagnating. In this case, traders will lean towards high-yielding currencies against the USD.
  • An expected change in the NFP figure often causes mixed reactions. Most traders will choose to turn to other sub-components for them to gain some insight or direction. This could including turning to the manufacturing payroll or rate of unemployment sub-component. It essentially means that if the rate of unemployment increases and the manufacturing jobs decrease, they will drop the USD for other currencies. However, if it is the opposite, traders often side with the USD.
  • if the NFP figure is higher, it means the economy is growing. The addition of more jobs to people contribute to a more robust and healthier economy.

Nonfarm Payrolls Trading Strategies

fundamental analysis

Many traders are always watching these announcements. This means that it is very likely for the markets to experience sharp shifts in either direction. It is why it is a very popular and viable trading opportunity for many traders. To have a better understanding of how these reports work, there are some techniques you can employ. Here are some of them.

1. Fading the initial move

You can choose to wait and see how the forex market moves on the release. The moves can sometimes be very volatile and could cause an initial knee-jack movement. This strategy can help you combat that.

Fading a knee-jack reaction involves just waiting it out. Sometimes it only takes minutes. Afterwards, you can short and place a stop-loss order. It can also be a good strategy where markets aggressively drop after the release.

2. Trading the trend

This strategy works under the assumption that the initial market shift is correct. For instance, if the initial reaction of the market was sharp, you can then assume that that is the start of a trend for that trading day. You can do this by analysing the previous reference points.

3. Risk management

The volatility surrounding the announcements could be a great opportunity to make significant profits. However, it could also lead to significant losses pretty fast. That is why you may need a risk management strategy. This involves placing a stop-loss order to avoid huge losses if the market doesn’t move in your favour.

Conclusion

There is no one certain way of trading NFPs (Nonfarm Payrolls). They can result in great profits or huge short-term losses. Therefore, even as you weigh your NFP options, always remember to place risk management order to cushion you. Always start with small accounts and gradually grow.


Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.

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