Trading NFP: What it is and How it Affects the Market

08:30 AM Eastern Time on the first Friday of every month is a particularly significant time for Forex Traders. 

This is the time, every month, that the US Bureau of Labor Statistic releases the Non-Farm Payroll (NFP) report and this report is probably the biggest fundamental piece of data that the market gets regularly.

Note: There are some months that they may change it the the second Friday of the month but you can check the NFP Calendar below.

Let's start by understanding what NFP is...

What is Non-Farm Payroll (NFP)?

NFP looks specifically at net changes in the employment rate in the US every month. The term Non-Farm is used since farm/agricultural workers are not included in the employment figures.

The decision to omit these farming jobs lies in them being largely seasonal that could possibly produce small temporary shifts in labor reporting. For this reason, certain government employees, private household employees, and nonprofit organizations are also not included in the count.

But what's the significance of these numbers...

Why are NFP figures relevant to the Forex Market?

This NFP data is analyzed so closely because of its importance in identifying the rate of economic growth and inflation in the US.

The difference between the actual non-farm data and expected figures are what determine the overall effect of that the data has on the market.

If the NFP is growing, this is a good indication that the economy is growing and vice versa. However, if the growth in non-farm payroll occurs at a particularly fast rate, this may lead to an increase in inflation.

In Forex trading, the level of actual non-farm payroll compared to the estimates is what makes the biggest impact.

If the actual data from NFP comes in higher than the economists' predictions and estimates, forex traders will usually buy U.S. dollars in anticipation of currency getting stronger. The opposite is true when the data is lower than the economists' expectations.

But it doesn't only affect the USD. With the US economy being one of the largest in the world and USD being the most traded currencies, these figures have a knock on effect to the other currency pairs.

To trade NFP or not to trade NFP, that is the question...

Trading NFP from a Conservative Traders Perspective

For this, I've looked to Urban Forex and Forex Watchers Senior Trader Armand L'Ortije.

Armand says:

"I personally don't trade the NFP. Let me elaborate on that further on.

It is the biggest monthly news event and it generally fuels quite a bit of market movement, not just among the USD group, but often in other currencies too.

On top of that, big CAD news often coincides with NFP and while this is not always the case, many people forget about it and focus all their attention - and nail-biting tension and emotions - on USD. At times some really nice CAD moves play out during this time too.

So, why don't I trade this you might wonder?

Well, during NFP, spreads rise, fills become harder and spikes happen more often.

All this requires me to adapt to this market climate and - as a conservative trader - it means I need to widen my stops to stay safer.

This means my risk to reward becomes less than it should be for such big moves that the NFP can make.

That made me realize that I'm trading the market with the same risk to reward as I would a more orderly market, but I have to deal with a lot more of a nervous market now.

So for me, it doesn't make sense to sit through this nervous market when I make the same amount of account growth on a more modest market climate.

So I'd rather call it an early start to the weekend on the Fridays that NFP is scheduled :)"

Trading NFP from an Aggressive Traders Perspective

Who better to ask about this than Urban Forex and Forex Watchers Senior Trader, Educator and Mentor, Navin Prithyani.

Navin says:

"As an aggressive trader, I have a more aggressive approach to the NFP.

I’ve been watching the NFP unfold month after month for over a decade now. I was never interested in what the numbers actually were but more keen to see the activity around it.

What's the use of being good at predicting the fundamental numbers if you can’t participate in the opportunity correctly due to a technological disadvantage?

Its a bloodbath amongst the pros to react to the numbers down to the nanosecond - the strongest technology/connection wins.

As a retail trader, I noticed the big disadvantage I was at.

I knew I needed a different kind of edge instead of - listening to the quickest news I could find and then execute based on the numbers, the tone of the reporters, surrounding news that's released with it, money management plans to execute at different prices and having plan A-Z ready on standby - lets not forget, all of this needs to happen flawlessly.

I generally keep my plans ready on which way I’m trading based on the research on the market hours before to get a feel for what the big players have been planning for this event a week to a week and a half before the release.

I follow that trail and execute my trades.

Now I’m aware the NFP news event in Forex is the devil itself, haha and it’s going to try to mess with my trade to possibly reach better limit/stop orders before the offset begins and we get a one-sided flow.

However, I prepare for these events now and spot the areas ahead of time and watch for reactions around it."

Navin's trade example from the last NFP (Feb 2018)

"This last NFP, I got snagged on my initial order, however, I was able to get in not very long after with an extremely tight stop, while still alerting my students as to what I was doing and updating my posts in the Elite Community.

As aggressive as I trade NFP, I respect the risks that come with it as well.

I treat it like another asset. It adds another 5-10% to your overall account over time. I don't treat it as my regular "Go to Trade" / "Bread and Butter" trades. It’s just another edge for me."

Trading NFP - Pros and Cons?

Pros:

  • More market movement than usual meaning there is a chance to make big trades
  • Good for aggressive traders

Cons:

  • Spreads widen due to market volatility 
  • Spikes are more likely which can stop you out
  • Not good for conservative traders

How do you trade NFP?

Do you know what type of trader you are?

Are you an aggressive trader like Navin that likes to participate in that mayhem?

Or are you a conservative trader like Armand who prefers to get a head start on the weekend and make his winning trades elsewhere?

Let us know in the comment section below.

Both approaches can bring great success as proven by Navin and Armand, but it is important to know and understand the type of trader you are.

If you enjoyed this article do share it around and let me know in the comment section below :)

With Pip love,

Garry at Urban Forex

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