What are non-farm payrolls?
Non-farm payroll (NFP) employment is a statistic representing the total number of paid workers in the US, excluding those in the government, private households, non-profit organisations and farms. This report also includes average working week and average weekly earnings estimates and is released on the first Friday of every month.
What impact to non-farms have on the fx market?
The NFP report consistently results in large movements across all the major currency pairs, and large forex trading volumes.
As a result, many analysts, investors, investors and economists anticipate the NFP number and the market movement it will cause. If the level of non-farm payrolls is lower than payroll estimates, traders will usually sell the USD in anticipation of a weaker currency resulting from a ailing economy. Likewise, when the level of payrolls is higher than the estimates, traders will usually buy the USD.
Strategy for trading non-farm payrolls
The most consistently successful NFP trades take place once the market has processed the information and dominating momentum produces a stronger trend.
This strategy can be traded using a five or fifteen minute chart, and it is best to choose one or the other, as signals can vary depending on time frames. The following steps refer to a fifteen minute chart.
8:30 – 8:45am. The NFP report is released at 8:30, so the 8:30 – 8:45 bar will be wide-ranging. We do nothing yet, waiting for an inside bar (so a bar that occurs within the price range of the previous bar) to occur after the initial bar. This may not happen immediately, meaning a trader may have to wait for a number of 15-minute intervals for the first inside bar to appear.
2. The inside bar’s high and low range establish the potential trade triggers. If a subsequent bar closes above the inside bar, we trade long, and if a subsequent bar closes below the inside bar, we trade short.
3. Place a 30 pip stop on the trade you entered. You can make up to two trades, and if you get stopped out, don’t re-enter.
4. Exit strategies include a time frame or a trailing stop. As most NFP forex pair movements take place within four hours of the announcement, you can set an exit four hours after your entry time, or set a trailing stop which will close the trade automatically when the market turns.
Points to consider
Although this strategy can be very profitable, it is not successful 100% of the time. If the market moves aggressively in one direction, the momentum may already be fading by the time we get an inside bar signal.
By trading non-farm payrolls after an inside bar has occurred, the initial volatility of the report has settled and the market is likely to move in one direction. In times of high volatility, forex rates can reverse quickly, which is why it is essential to place a stop loss, but by controlling risk with a stop loss traders can make large potential profits from the large moves that usually follow the release.
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Forex may not be appropriate for everyone, so please make sure that you understand completely the risks concerned.