How to Trade Nonfarm Payroll

How to Trade Nonfarm Payroll

The forex market is an exciting and dynamic market that offers a wealth of trading opportunities. Many global economic events affect the forex market, and one of them is the U.S. nonfarm payroll report, popularly known as the NFP. The NFP is one of the leading economic news releases from the United States, and it usually affects the performance of the U.S dollar (USD) against other major and minor currencies. Due to its importance, this report has quickly become a powerful trading indicator for forex traders. However, how do you trade NFP on the forex market? This post seeks to provide you with everything you need to start trading the nonfarm payroll report.

What is the Nonfarm Payroll Report?

The Nonfarm payroll (NFP) report is a measure of the number of workers in the United States, excluding farm workers and others in specific classifications, such as private households, and non-profit employees, which we will discuss shortly. The statistics are released by the Bureau of Labor Statistics (BLS), which looks into the payrolls of private and government bodies across the United States. The BLS then reports the NFP numbers to the public every month in its “Employment Situation” report.

Understanding the Nonfarm Payroll Report

From the name, the NFP report implies that only farmworkers are excluded from the data. However, as mentioned above, there are several other job categories that the BLS does not cover when compiling the nonfarm payroll report. The BLS reveals that the non-farm employee classifications account for around 80% of the business sector in the United States and contribute as much in the gross domestic product (GDP). Although this represents the majority of the labor force in the United States, there are some sectors that are notably excluded from the nonfarm payroll reports. They include as follows: 

Government Workers: Government employees are a key part of the BLS report every month, but some government workers are not covered. The government BLS category covers civilian employees but does not include military employees and employees of government-appointed officials. Furthermore, employees from the National Security Agency, the Central Intelligence Agency, National Imagery and Mapping Agency, and the Defense Intelligence Agency are also not covered in the report. 

Proprietors: These are unincorporated business owners. The proprietors include sole business owners and self-employed individuals who work without registered business incorporation (partnership, corporation, or limited liability.)

Private Households: This includes domestic household workers. 

Non-profit employees: Although this is a massive sector, workers from this space are also not included in the nonfarm payroll statistics.

Analyzing the Monthly NFP Report

The BLS publishes the “Employment Situation” report on the first Friday of every month after collecting data from the previous month. The employment situation report is always released by the BLS at approximately 8:30 a.m.

The government agency creates this report from two comprehensive surveys. They are the Household Survey and the Establishment Survey. The results from these two surveys are merged to become a single comprehensive monthly report. The Household Survey is used in creating the unemployment rate report as well as further information on employment demographics. Meanwhile, the Establishment Survey obtained by the BLS is what is known as the nonfarm payroll (NFP) report, which provides the headline number of the number of NFP jobs that were added within the national economy. 

Household Survey

The key aspects of the Household Survey include: 

  • Employment data by types of alternative employment
  • Unemployment rates by age
  • Unemployment rates by race
  • Unemployment rates by education
  • Unemployment rate
  • Unemployment rates by gender
  • The participation rates
  • Reasons for unemployment

Establishment Survey

The establishment survey aspect of the employment situation report gives insight into the nonfarm payroll additions. As a result, this is the reason why it is popularly called the nonfarm payroll report. Some of the key components of this survey include: 

  • The total number of nonfarm payrolls added by entities for the reporting month
  • Details on hours worked
  • Details on average hourly earnings
  • Nonfarm payroll additions by sector category: durable goods, non-durable goods, services, and government.

Nonfarm Payroll Dates 

The nonfarm payroll report is published on the first Friday of every month. As a trader, you can keep track of the upcoming NFP releases along with other important forex market events using the economic calendar which is often provided by brokers and other reputable platforms.

An economic calendar provides you with direct access to vital market news and it provides a schedule of the dates of significant releases or events that may impact the price of assets or markets as a whole. The economic calendar is used by global investors to boost their trading profitability and accuracy and it is an excellent resource to finetune your predictions of future market prices. 

Why Is the Nonfarm Payroll Report Important?

The NFP is important in the forex industry because of its importance in the United States. Since the U.S is the largest and most productive economy in the world and the U.S. dollar (USD) is the reserve currency of the world, any metric that affects these factors, can impact the entire forex market. 

The NFP provides insight into the core fundamental conditions that drive the U.S. Wage gains and labor market health have a direct impact on consumer health. That is, when more people are employed and wages are rising, employees are usually more confident and have more access to money. As a result, consumers are then more likely to spend money and this then fuels the broader economy.

The IMF (International Monetary Fund) revealed that the dollar contributes to over 60% of the forex exchange reserves globally. Hence, big moves in the U.S. dollar affects the financial markets. This is even true for the nonfarm payroll report. The volatility of the NFP usually ripples through various asset classes, not only forex. Aside from the forex market, the NFP report impacts stock and commodity prices. Based on this, it is evident why the NFP data is especially important to financial market traders. 

Economic Analysis

The NFP numbers and the unemployment rate are key figures of the Employment Situation report. However, policymakers and economists utilize all the available data to assess the current state of the U.S economy and to make economic predictions. The report contains several valuable insights into the labor market, which has a direct impact on the economy, the value of the U.S dollar, as well as the forex and stock markets. It also has an impact on the price of gold and the value of Treasuries. 

Economists look into the Household Survey to analyze the trends in the unemployment rate, participation level, and other trends linked with demographics. The nonfarm payroll report also offers economists deeper insight into the various economic sectors. The report shows the sectors that are expanding and contracting. The sectors that are expanding usually contribute a higher number of new payrolls, while those that are contracting will have lower or negative contributions to the number of payrolls in the country. 

Analyzing the Nonfarm Report Figures

Similar to the other economic data, there are various ways to analyze the nonfarm payroll figures. 

  • A higher NFP number is good for the United States economy. This is because more jobs have been added to the economy, and it contributes to the growth of the country’s economy. Consumers that have jobs and money usually have more spending power, which leads to economic growth. Because of this, forex traders and investors keep an eye out for a 100,000 job increase per month. A job increase above 200,000 will help the U.S dollar (USD) make substantial gains against the other leading currencies. 
  • The expected change in payroll numbers leads to a mixed reaction in the forex market. Forex traders seeing an expected change in the nonfarm payroll report will focus on other sub-components of the report to gain further market insight. Some of the components they look at include the unemployment rate, manufacturing payroll, and more. Therefore, if the unemployment rate declines or the manufacturing payrolls increase, forex traders will bet on a stronger dollar and a positive growth for the U.S economy. However, if the unemployment rate increases and the manufacturing jobs decline, traders will drop the USD for other major and minor currencies. 
  • A low NFP figure will hurt the U.S economy. Similar to other economic data, a lower employment rate is negative for the economy of the country and the U.S. dollar. If the NFP data is below 100,000, it is an indicator that the economy is not growing. Forex traders will shift to other high-yielding currencies and bet against the dollar. 

How to Trade the Nonfarm Payroll Report

The NFP report usually causes increased volatility in the currency market, hence, presenting real trading opportunities in the forex market. The NFP data can be extremely lucrative for traders, but it can also be dangerous for traders that do not know exactly what to do or don’t abide by a well-established and tested trading strategy.

There are two trading strategies you can deploy to trade the nonfarm payroll report:

Short-term NFP Trading 

As a forex trader looking to trade the NFP report in the short-term, you can take a position before the report comes out or after it is published. 

Trade before the report is published: 

When you want to trade before the NFP report is published, you should consider using a breakout strategy to trade. With a breakout strategy, you can establish a range around the asset price just before the report is published, allowing you to capture any movement that breaks outside the range, either upwards or downwards. 

In this type of strategy, money and position management are key to your success since the breakout strategy needs rapid execution. This strategy is not always recommended for new traders. 

Trade after the release:

When taking a trading position after the NFP report has been published, you should consider using a momentum strategy. The momentum strategy involves following the momentum of the forex market at the time of the report and staying in that course for as long as possible while adding positions as the forex markets move in the direction of the first position you took. 

While the momentum position can be fruitful, it requires accurate execution, adequate knowledge, and strong experience of the forex market. Based on this, the momentum strategy is best suited for expert traders. 

Wait and see strategy:

The third short-term NFP trading strategy is to wait and see what happens in the market. With this strategy, a trader will enter the market following false signals or when the price reverses. It is a strategy best suited for newbie and conservative traders. The aim is to allow the publication of the NFP report to cause violent movements in the market before taking a position a few minutes later. Usually, based on a 5-minute chart, the market might try to go in one direction but fails to do so and finally turns around and moves in a new trend or resumes the previous underlying trend. 

Trade the NFP for the Long Term

When it comes to long-term NFP trading, traders need to analyze the nonfarm payroll report before taking a position based on fundamental analysis. This is because this type of trading style is intended for the medium to long-term. The approach is mostly reserved for people that play the long game, usually investors and swing traders. 

The NFP economic event presents traders with a period for taking positions and when to get out of the positions. Knowing economic fundamentals is important here to help you analyze the economic context and make the right decision when swing trading or investing. 

Classes of NFP traders

There are three main classes of NFP traders. These include as follows: 

Scalpers

Scalping the NFP report involves taking advantage of the market’s volatile reaction to the publication as soon as it is published. The scalp traders usually operate within a 1-5-minute timeframe. You can immediately take a position or wait for a few minutes before you take a position. The stop loss order should be kept above or below the swing points. Meanwhile, for the take profit positions, you can use the most recent fair value areas and swing points to enjoy high profitability target areas. 

Day Traders

The day-trading technique is similar to the scalping one, however, here, there is a longer timeframe, usually the 15-minute chart. Also, the trade in this type of trading style can stay open longer than usual. With the scalping method, a trader usually closes the trade within an hour after the publication. However, the day-trading method allows the trades to stay open for a few trading sessions. When using the day-trading method, traders wait for the initial move, lower or higher, to stop and lead to a pullback before they enter. 

Swing Traders

The swing trading NFP report is different from the first two we talked about. With the swing trading method, traders will be trading on higher timeframes, starting from one hour to the daily timeframes. Before the NFP report release, traders usually have an idea of what to expect and prepare for that. The trader can be bullish towards the USD and bet on it, or they can be bearish and bet against the USD by taking positions in another currency. 

The Rules

For scalping and day-trading, there are certain rules that guide traders. The strategies can be traded using 1-15 minutes charts. 

  • Traders will not take action during the first bar after the NFP report (usually 8:30 to 8:45 a.m. when using the 15-minute chart)
  • The created bar will be far-reaching. As such, traders can wait for an inside bar to take place after the first bar. This means that they are waiting for the range of the most recent bar to be completed within the range of the previous bar. 
  • The high and low rate of the inside bar sets up the potential trade triggers. When the next bar closes higher or lower than the inside bar, traders take a trade position in the direction of the breakout. Traders can also choose to enter a trade as soon as the bar moves above the high or low bar without waiting for the bar to completely close. Stick to any method you choose. 
  • You can enter a maximum of two trades. However, if both trades get stopped out, it is best not to re-enter. The high and low points of the inside bar can be used again for a second trade if necessary. 

The NFP trading style is time conscious as most of the moves occur within the first few hours. As a result of this, traders usually exit hours after their entry time. For a trader that wishes to stay in the trade, a trailing stop is recommended. 

Final Thoughts – Trading the Nonfarm Payroll Report

This post looked into the nonfarm payroll event and how it affects the forex market. We discussed what the NFP is and how traders can properly analyze it. Most importantly, we learned that the NFP data is tradable and impacts market movements and as such, traders should take advantage of it. To ensure that you always stay ahead and profit from the nonfarm payroll event, make sure you do the following; 

  • Follow an economic calendar online and keep track of when the NFP data will be released. 
  • Carry out personal research about the market regularly. This will let you know what the market analysts are expecting from the NFP data publication. You should also read up on comments from investment banks to gain further insights into the market. 
  • Spend more time analyzing the NFP numbers as they are released. Don’t be under pressure to trade currencies if you don’t fully understand the NFP report. Simply analyze the data and get a feel of how the forex market reacts to them. Once you have gained the confidence and knowledge of how the NFP report impacts price movements, you can then trade. 
  • With the NFP event, find out how top analysis interprets the data. Doing so will help you gain further understanding of how the markets related to the NFP event. 
  • To ensure that you do not risk losing your money, follow proper risk management strategies, especially during risky and volatile events like the NFP. 

Now that you understand the importance of the nonfarm payroll report, it is time to open an account with a reputable online broker and to start making your trade. 

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Anton Kovacic
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