Smart traders typically reduce their normal position sizes on NFP days due to the higher volatility. They’ll also set wider stops than usual to account for the larger price swings. When unexpected NFP or CPI data is released, you can employ the following strategies to capitalize on the volatility. There is also the need to factor in what the report will mean for underlying interest rates in the US.
The Federal Reserve watches NFP releases closely when making their monetary policy decisions. A strong NFP report often leads to interest rate hikes to control inflation caused by more people having jobs and spending more. A weak NFP report prompts the Fed to lower rates to stimulate the economy when there’s limited money in circulation since fewer people have jobs and opt to save money rather than spend. Most major Forex pairs, such as EUR/USD, GBP/USD, and USD/JPY, experience sharp price swings after the NFP data release because they involve the U.S. dollar. This volatility provides multiple trading opportunities for traders if they can accurately predict the market reaction. The release of the NFP news also causes high volatility in the forex market.
NFP in Forex Trading
Understand the NFP news and its impact on the forex market, especially on major currency pairs like USD/JPY, AUD/USD, and EUR/USD. Whilst the interpretation of the data is important in the broader economic context it is not as important for traders using strategies that rely on this heightened volatility. Apart from the monthly NFP reports, the Bureau of Labor Statistics is also responsible for releasing the US Consumer Price Index (CPI), which is used to measure inflation.
Predictions and expectations: analyzing asset behavior before the NFP and CPI release
By using a strategy known as “fading” the opening move, this can be avoided. It is not enough to be proficient in technical analysis tools 🛠 for successful trading in financial markets. Fundamental factors have a significant impact on the quotations of many liquid assets, including stocks, currencies, and indices.
- Forex traders make informed trading decisions by monitoring and comparing the NFP consensus predictions against the actual data.
- According to the Federal Reserve’s mission on employment, the total number of jobs created or eliminated is a sign of the health of the economy.
- Traders also closely watch wage growth data and revisions to previous months’ figures.
- Hence, a strong NFP forex report shows a positive economic expansion, while a weak NFP report suggests a potential economic drain of the USD, which will impact currency pairs like EUR/USD, USD/JPY, and GBP/USD.
- Many market participants, traders, investors, and financial institutions around the world follow the report and base their trading decisions on its outcome.
- It’s an indicator of economic health, and a strong economy prompts companies to hire more workers.
NFP (Non-Farm Payrolls) Trading Strategy (Backtest & Rules)
If the NFP report shows a decline below 100,000 jobs or fewer, the U.S. economy is likely stagnant and traders will favor higher-yielding currencies against the U.S. dollar and other assets. However, consumer preferences for imported goods should be taken into account, as rising incomes can lead to an increase in the share of imports in the trade balance. If the NFP figure is ”unhealthy,” other indicators of economic growth are viewed with some skepticism. Non-farm payroll data and related statistics can also cause a domino effect, which, in turn, will further affect market performance. When job gains accelerate rapidly, ⏩ the Federal Reserve can relate this data to interest rate changes, potentially pushing through an increase or decrease depending on the circumstances.
How to trade NFP – NFP (Non-Farm Payrolls) trading strategy backtest
NFP reports exclude jobs nfp trading in the farming, government, non-profit, and private household sectors because they don’t reflect the wider employment trends or economic conditions. Here, you identify key support and resistance levels using technical analysis. Set your pending orders (buy stop/sell stop) near breakout zones based on your preferred trading strategy. Choose your risk-reward ratio and adjust your trading position sizes according to your plan.
Consider using a demo account to explore how NFP announcements affect forex and CFD markets without risking real capital. Remember that NFP may represent one of the most volatile trading periods in forex, however it’s not just about the initial spike. The most profitable trades often come from the subsequent trending moves after the market has digested the data.
NFP news can also influence the overall market sentiment, increasing investors’ risk appetite and confidence. Traders tend to take more risks when there is an indication of a strong economic system, like positive employment data. Employment data influences both monetary and fiscal policy, impacts financial markets and helps businesses make informed investment decisions.
One presumption is that the market’s sudden movement following the announcement of the non-farm payrolls signals the beginning of a trend for the following trading day. ➡️ A higher payroll figure is generally good for the U.S. economy, citing more job additions and more robust economic growth. Traders and investors look for a positive addition of at least 100,000 jobs per month. Any release above that figure or the estimated consensus will help to fuel U.S. dollar and other assets gains. Whether you choose to trade actively during NFP or wait for the dust to settle, having a deep understanding of how this report impacts currency markets is crucial for any serious forex trader.
- One NFP forex trading strategy is to wait and observe how the markets respond to the news.
- Trading non-farm payrolls can present the opportunity for increased profits on a variety of markets, but the announcement can cause volatility, increasing risk.
- High NFP usually strengthens the U.S. dollar, while a low indicator can weaken it.
- What makes NFP particularly exciting (or nerve-wracking, depending on your position) is that the market reaction isn’t always straightforward.
Given this relationship between the NFP report and interest rates, there is no wonder it is followed by traders in various financial markets. 📌 This indicator is very important for financial markets, since the wage and tax fund of non-agricultural employment is a significant share of the GDP of the country in which the report is published. Accordingly, a sharp fall or increase in the number of employed people may indicate a dramatic market change, problems in the economy or sustained growth. After all, the labor market reacts faster to economic changes, as well as to possible crisis situations. Trading NFP can provide significant opportunities in the forex market, but it’s essential to approach it with a well-thought-out strategy and solid risk management.
A positive NFP report indicates a significant job increase and a strengthening US economy. Traders interpret positive NFP data as bullish for the USD and increase their expectations of higher interest rates from the Federal Reserve (FED), leading to traders buying the currency. Non-farm payrolls, or NFP, is an economic indicator that estimates the total number of jobs gained or lost in the U.S. economy for the past month, excluding jobs in farms and other categories. Since the U.S. economy is a major player in the financial market, the NFP results can also influence global trades, commodities, and emerging markets. A sustained positive change in the U.S. job market can influence investor confidence, thereby increasing economic expansion.
The Non-Farm Payrolls (NFP) report is a key economic indicator that provides a comprehensive picture of the employment situation in the United States. It is considered to be one of the most important economic indicators on the global macroeconomic calendar and as such is normally a catalyst for high volatility in certain assets. Since the job market is the heartbeat of the economy and an engine of growth, the NFP report sets the tone for the financial markets, especially the bond market. It’s an indicator of economic health, and a strong economy prompts companies to hire more workers. Another NFP forex trading strategy involves traders assuming that the first market response was accurate.
For those reasons that we will often see significant moves in forex markets, after the release of the NFP report. EUR/USD experienced an initial bearish move before regaining strength as market participants portrayed mixed feelings over the strength of USD. Rapid price movements often lead to slippage, which means trades are executed at unfavorable positions. Traders place trade entries on the retest of the broken support or resistance level. The NFP meaning implies that some jobs (non-farm) are excluded from the report. The jobs excluded from the NFP are farm employees, government workers, private household employees, employees of nonprofit organizations, and self-employed individuals.
Instead, experienced traders often wait for what they call the “NFP drift” – the more sustainable price movement that develops 2-3 hours after the news release. Traders also closely watch wage growth data and revisions to previous months’ figures. Higher wages can signal inflation pressures, while significant revisions can change the market’s entire perspective on the economy’s health.
Step 5: Identify Key Levels
A strong NFP report may lead to better monetary policy and increased interest rates. This can strengthen the USD, while a weak report would lead to a decrease in interest rates, which can weaken the USD. The market post the NFP release moves fast most of the time so automate as much of the process as possible. If the market moves inline with expectations and the direction of trade, adjust stop-loss orders to lock in profits and reduce risk. Consider taking partial profits at key support/resistance levels to secure gains while leaving positions open to gain further from potential moves. Aside from those currency pairs which are affected directly there is also an indirect reaction in the markets due to the USD relationship with commodity prices.
It offers significant trading opportunities, especially when the released reports differ from market expectations. Traders use strategies like trend-following to capitalize on the sudden post-release market shifts. The NFP release has wide reaching market implications but the reaction is most notable in the currency markets.
Hakan Samuelsson and Oddmund Groette are independent full-time traders and investors who together with their team manage this website. On the other hand, when NFP figures fail to meet the market expectation, traders see it as bad news for the US stock market and lose faith in the market. On the other hand, a lower employment picture is negative for the US economy.