Trading non-farm payrolls

What is the non-farm payroll report?

Non-farm payroll (NFP) employment is a statistic representing the total number of paid workers in the US, excluding those in the government, private households, non-profit organisations and farms. The report is released on the first Friday of every month and also includes estimates on the average work week and the average weekly earnings of these workers.

How do non-farm payrolls impact the forex market?

The NFP report consistently results in volatility across all the major currency pairs, and large forex trading volumes.

As a result, many economists, traders, analysts and investors anticipate the NFP number and the directional movement it will cause. If the level of non-farm payrolls is lower than payroll estimates, traders will usually sell the USD in anticipation of a weakening economy and currency. Likewise, when the level of payrolls is higher than the estimates, traders will usually buy the USD.

Strategy for trading non-farm payrolls

One strategy for trading non-farm payrolls is to wait for the market to digest the information and, after the initial volatility has died down, then to enter the market in the direction of the dominating momentum.

This strategy can be traded using a five or fifteen minute chart, but these steps refer to a fifteen minute chart. As signals can vary depending on the time frames, it is best to stick with one or the other.

1. 10:30 – 10:45pm AEST. The NFP report is released at 8:30, so the 8:30 – 8:45 bar will be wide-ranging. We do nothing yet, waiting for an inside bar (so a bar that occurs within the price range of the previous bar) to occur after the initial bar. This may not happen immediately, meaning a trader will have to wait for the first inside bar to appear.
2. The inside bar’s high and low range establish the potential trade triggers. If a subsequent bar closes above the inside bar, we trade long, and if a subsequent bar closes below the inside bar, we trade short.
3. Place a 30 pip stop on the trade you entered. You can make up to two trades, and if you get stopped out, don’t re-enter.
4. The target is a time target – typically, most of the NFP currency movements take place within four hours of the announcement, so we will exit the trade four hours after our entry time. An alternative exit strategy would be a trailing stop.

Points to consider

Although this strategy can be very profitable, it is not successful 100% of the time. If the market moves aggressively in one direction, the momentum may already be fading by the time we get an inside bar signal.

By trading the NFP report after an inside bar has occurred, the initial volatility of the report has subsided and the market is likely to move in one direction. In times of high volatility, forex rates can reverse quickly, which is why it is essential to place a stop loss, but by controlling risk with a stop loss traders can make potentially large profits from the large moves that usually follow the release.