What is NFP in Forex

The nonfarm payroll (NFP) report is a key economic indicator for the United States and represents the total number of paid workers in the U.S. excluding those employed by farms, the federal government, private households, and nonprofit organizations.

The nonfarm payroll report consistently causes one of the largest rate movements of any news announcement in the foreign exchange (forex) market. As a result, many analysts, traders, funds, investors, and speculators anticipate the NFP number and the impact that it will have on forex.

The NFP report is typically released on the first Friday of each month, providing the total monthly increase or decrease in paid U.S. workers across most businesses. Increasing numbers may show economic expansion but may also give investors reason to be concerned about inflation and decreasing numbers suggest a broader economic concern.

How Does the NFP Affect Forex?

NFP data is a crucial economic report that shows the state of the American economy.

A country that wants to have the biggest economy in the world should consider creating more jobs for its citizens and having a massive number of government employees. What's more, a high employment rate translates to much better economic strength.

With more jobs, employers increase their wages, which makes employees have extra income to spend. In the end, this spending boosts inflation and GDP. This is one of the reasons why NFP data releases are among the eagerly awaited news announcements, especially in forex markets.

Due to this, forex investors assess NFP economic data releases as it has a direct relationship between the interest rates and job creation level. The interest rates rise if the economy is strong and the average of job gains is strong too.

On the other hand, low wages and weak jobs result in a weak economic environment. After the release of the NFP report, the forex market underwent significant price movements.

The NFP Release Process

The Bureau of Labor and Statistics releases the report or the payroll statistics as a subset of the Employment Situation Summary on the first Friday of each month at 8.30 am Eastern time.

NFP releases and unemployment data are used by economists and politicians to assess the state of the US economy, and to create an outlook for future economic activity. There are a few areas that traders particularly should watch out for:

1. Unemployment data: This is the most closely watched figure, as it has the most influence over the Federal Reserve's judgement of economic health.

2. Sector growth: The report shows which sectors are expanding by adding jobs and which are contracting, contributing to unemployment. This can give an idea of which stocks, indices and ETFs could rise and fall in the future.

3. Hourly earnings: Wage increases and decreases is also another area of the report that gets attention - as pay growth shows economic health, while reductions in wages shows declining prosperity and falling consumer spending. This could have a knock-on effect to company revenues.

4. Revisions of the previous NFP report: Any changes to previous growth expectations can create market movements as traders re-assess their current positions.

Trading Strategies During NFP

NFP forex trading strategies are a good fit for the more advanced trader. That's because the NFP report brings with it increased volatility. We also see a significant reduction in liquidity in the lead-up, which makes spreads wider and risk higher.

So as a general rule, it is advisable not to trade off the release itself and even holding trades into the release is not something new traders should be doing.

The most effective strategy for trading the NFP report is to combine a combination of both technicals and fundamentals.

Firstly, you need to identify the forex pair that might be most impacted by the result. Clearly the USD will be heavily impacted.

A good choice would be the EUR/USD or GBP/USD based on strong liquidy.

Remember that a result that sees the NFP report beat expectations, will likely be a positive for the USD.

So that would mean that the EUR/USD or GBP/USD would likely trade inversely to the announcement.

As mentioned, we want to try and combine both technicals and fundamentals.

It's very important that we don't trade around the actual release itself. You don't want to have an open position going into the NFP report and you don't want to trade in the minutes following it.

You will often see price trading in wide ranges and whipsawing back and forth. That is oftentimes simply just traders executing market orders and stops getting hit. There is no real follow-through and not much to be gained by being involved.

However, in the 30-60 minutes following the release, the price will start to move and ideally trend in one direction.

Remember, the NFP report is a key fundamental catalyst. It will drive the price. From here we use technicals to build out a strategy.

We don't care about the result of the NFP report, we are simply looking to go with the momentum.

Prior to the release, you should identify key support and resistance levels on a 30-60 minute chart. Then when price breaks through these levels, you're able to use them as your entry signal.

That way you are buying strong pairs above key resistance and shorting weak pairs below support, with a fundamental catalyst behind them.

Common Mistakes to Avoid

Here are a few tips to remember when using NFP data releases to inform your forex trading:

1. NFP data is released on the first Friday of every month.

2. The NFP data release is accompanied with increased volatility and widening spreads.

3. Currency pairs not related to the US Dollar could also see increased volatility and widening spreads.

4. Trading the NFP data release can be dangerous due to the increase in volatility and possible widening of spreads. To combat this, and to avoid getting stopped-out, we recommend using the appropriate leverage, or no leverage at all.

While this strategy can be very profitable, it has some pitfalls to be aware of. The market may move aggressively in one direction and thus may be beginning to fade by the time an investor gets an inside bar signal. In other words, if a strong move occurs before the inside bar, it is possible that a move could extinguish before a signal. During high volatility times, rates can reverse quickly even after waiting for a pattern to set up. This is why it is essential to have a stop in place.

Of course, in addition to the example NFP trading strategies we have looked at, another option is to adopt a “wait and see” attitude.

Many traders, and not just beginners, actively choose to stay away from the markets around the times of big news releases such as the nonfarm payroll, because of the volatility and wild market movements which can accompany these type of events.

Instead, this group of traders may watch what happens during the news announcement, wait for the market to settle, and then take a decision on what to do based on the announcement and how the market reacted.

If you do choose to trade during the NFP, it is highly recommended that you practise any nonfarm payroll strategy thoroughly on a demo trading account before implementing it on a live account.

It can also be useful to backtest your strategy, by going back over historic price data and seeing how your NFP strategy would have worked in the past if you had used it. Note what would have gone right or wrong and adapt your strategy accordingly.

Conclusion

The logic behind the strategy of trading on the NFP report is based on waiting for a small consolidation, the inside bar after the initial volatility of the report has subsided and the market is choosing which direction it will go. By controlling risk with a moderate stop, you are poised to make a potentially large profit from a huge move that almost always occurs each time the NFP report is released.

Trading the NFP is not for everyone and for more conservative traders perhaps the best thing to do is avoid the market around its release on the first Friday of every month.

However, there are many traders whose style depends on volatility and who, therefore, thrive under such conditions. Regardless of what kind of trader you are, all trading is risky and the presence of increased volatility significantly heightens this risk. This is why risk management is so important in trading.