Professional traders often consider economic announcements as a reliable indicator of coming price action, and one of the biggest reports that capture traders' attention is the NFP. But what is the NFP, how does it affect the markets, and how can you trade it?
What is the Nonfarm Payroll (NFP)?
Nonfarm Payroll, also known as NFP, is a crucial economic event that holds significant influence for fundamental traders. Nonfarm Payroll is a monthly report released by the Bureau of Labor Statistics (BLS) as part of the US Employment Situation report.
The NFP measures the number of workers employed within the US economy, excluding farm workers, non-profit organization employees, private household employees, and unincorporated self-employed workers.
This report is considered to be a key indicator of the health and productivity of the US economy, and the announcement can sway everything from major currencies to stocks and indices.
NFP reports sway the markets
Before the release of any macroeconomic indicator, including the NFP, economists and market analysts provide forecasts or estimates. Traders can easily find these forecasts in an updated trading calendar. Most NFP estimates consist of three columns: Previous, Forecast, and Actual. Paying attention to the forecasted NFP result is essential for traders with US-based assets on their watchlist.
If the freshly published Actual result aligns with the forecast, the market reactions are typically minimal, as it has already been factored into asset prices. However, if the actual result deviates from the forecast, it can trigger a significant market reaction. The wider the deviation, the greater the volatility.
The impact of NFP is primarily observed in currency pairs involving the US dollar. If the NFP results exceed expectations, USD tends to strengthen, while lower-than-expected results can instantly weaken the greenback.
For instance, if the NFP reports fewer jobs created than anticipated, it reflects a slowdown in the job market, which is considered negative for the overall US economy. Conversely, better-than-expected results are usually seen as positive signs for the US economy.
NFP trading strategies
Trading around an NFP release can be volatile and risky. While some traders prefer to avoid the market during NFP release times, others find opportunities from the increased volatility. If you decide to trade during the NFP, it is crucial to have proper risk and money management strategies in place.
Traders typically follow this pattern:
- When the NFP result is worse than the forecast, consider buying EURUSD.
- When the NFP result is better than the forecast, consider selling EURUSD.
- When the NFP result aligns with the forecast, expect little to no influence on USD pairs.
Of course, there are hundreds of other influences on USD prior to the NFP release as well as afterward, which can contrast expectations, but a trader following that simple strategy will be right more times than wrong.
Why does the NFP report have such influence?
The whole thing sounds absurd. The total USD in circulation is over $2.26 trillion, and finding out that the job market fell by 0.1 percent means nothing for the overall economy. Moreover, the NFP release is a lagging report, typically released on the first Friday of each month. Whatever condition the job market is in, it’s been that way for weeks and doesn’t change at the moment the NFP report is made public.
The NFP report is more like a reactionary trigger that provokes and promotes sentiment and consequently USD trading volume. Often the market reaction to the NFP report, whether bullish or bearish, is short-lived, with spikes and crashes that create a big payday for traders who called it right, and account stop outs for those less fortunate.
This extreme and brief volatility affects traders who place orders just before the release. Those waiting until the report is published are entering a very risky market. Anyone reacting to a bullish NFP signal with a buy order will likely open at a high only to see the price plummet minutes later.
This is why some brokers protect their clients by freezing market access 15 minutes before the NFP release until 15 minutes after. Entering the market as volatility spikes is too much of a gamble, and caution is strongly recommended.
Check out the Exness economic calendar to see when the next NFP trading opportunity is coming. Is the Forecast higher than the Previous? If so, then it might be time to go long. If you choose to trade NFP, be sure to set a generous Take Profit to take advantage of the brief bull run, and a tight Stop Loss, just in case the forecast was wrong.
As for searching in advance for supporting evidence to back up a forecast, by all means search, but you’ll likely run into pages of contrasting evidence that will make your head spin. Stick to sources that have served you well in the past.
Beware, more jobs won’t always mean a stronger dollar. The cause-and-effect mechanics are weak, but the temporary trader sentiment is very real and can make or break a trader in minutes with spikes and crashes, so caution is advised, especially if you’re trading with higher leverage.
Consider keeping the Exness Trade app active and close at hand on the day of the NFP release. Pay attention to the breaking news and how pre-markets shudder in anticipation of major volatility, and remember that sometimes the news often creates sentiment that doesn’t support the data.