How To Trade the NFP

How To Trade the NFP
15 votes

NFP

The US NFP event is commonly considered one of the most popular events of the month emphasizing the importance of understanding how to trade the news. There is something special about it, and new traders would be wise to get well acquainted with it.
If you wish to learn about how to trade the news you can check our in depth explanation by clicking here

Let’s begin with the basics.

What is the US NFP?

NFP stands for “non-farm payroll”. This data release measures the amount of new jobs created in American businesses. This includes new workers of businesses that provide services, and produce goods, or workers that manufacture, or construct.

NFP data is released on the first Friday of every month by the U.S. Bureau of Labor Statistics.

The data does not include new jobs in farming (hence the title: “non-farm”). It also does not include non-profit workers, and household employees.

What are the effects of NFP?

The amount of new jobs within an economy is crucial to keeping the economy strong and healthy. The US is currently the largest economy in the world (although China is catching up fast), and the hype around US NFP is strong.

Traders around the world react instantly to US job employment stats, thereby causing the prices of popular assets to rise and drop.

The most commonly affected currency pairs include:

EUR/USD

GBP/USD

USD/JPY

USD/CAD

The most commonly affected commodity is Gold. Gold is inversely related to the USD (and a positive NFP report). Traders turn to Gold when they lose confidence in paper currencies, so if the NFP report causes pessimism in the USD, chances are that Gold will rise, as the USD falls.

Actual vs. Forecast

Traders should do their research prior to the event. In particular, traders should find out what numbers the analyst community is expecting to see from the U.S. Bureau of Labor Statistics. This is called the “Forecast,” and can be found on sites like Netdania.com, or Forexfactory.com.

The more research you do prior to the event, the better. You can also get a good sense of how traders will react to the data by finding the data from the previous NFP event.

The true NFP data is commonly referred to as “Actual” data. During the NFP event, the Actual data is released, and the price of the relevant assets will rise or fall depending on the difference between the Actual and Forecasted data. When there is a big difference between the two, there is a greater chance for a trend.

Base vs. Quote

The USD can appear both as a Base (i.e. USD/JPY, USD/CAD), or as a Quote (i.e. EUR/USD, GBP/USD).

When the USD is the Base of a currency pair, then the more jobs are created the greater the chance that the price will rise, and you can make money by placing a “Call” trade.

When the USD is the Quote of a currency pair, then the more jobs are created the greater the chance that the price will fall, and you can make money by placing a “Put” trade.

Let’s look at an example. If the analyst community Forecasted that 210,000 jobs were created in a given month, and the Actual report says that 280,000 jobs were created, then the currency pairs which have the USD as a base are likely to rise.

Catching the trend or trading the correction

Our analysts at Banc De Binary recommend choosing short expiry periods to trade the NFP. There are two possible methods of making in-the-money trades during an NFP event.

You can either catch the trend as it’s happening, or you can wait for the trend to end, and trade in the direction that the currency pair needs to move in order to correct itself.

Trading the trend may look something like this:

2 USD-JPY

Choosing to trade the correction, on the other hand, may look something like this:

3 USD-CAD1-1024x736

Summary

The NFP is one of the most popular events of the month because the markets frequently jump or fall in reaction to the news. It’s never too late to start trading the NFP. By understanding the data, and how traders react to specific data, you too can make in-the-money trades during this event.

Share This