Day-Trading the Non-Farm Payrolls (NFP) Report
The non-farm payrolls report is one of the most-anticipated economic news reports in the forex market. It is published the first Friday of the month at 8:30 a.m. Eastern time by the U.S. Bureau of Labor Statistics.
Learn what the non-farm report is and how it you can use it to day-trade Forex.
What Is the NFP Report?
The non-farm payroll report (NFP) gives a summary on the status of employment in the U.S. The data release includes a number of statistics, and not just the NFP (which is the change in the number of employees in the country, not including farm, government, private households, proprietors and non-profit employees).
As one of the most-anticipated economic news events of the month, currency pairs (especially those involving the U.S. dollar) typically see big price movements in the minutes and hours after the data is released. This makes it a great opportunity for day traders with a sound strategy to take advantage of currency's volatility.
The EUR/USD is the most heavily traded currency pair in the world, typically providing the smallest spread and ample price movement for making trades. The reason for this is that the currency prices fluctuate enough that there is an opportunity to make a profit on the movement of this currency pair without worrying about others.
The NFP is used by foreign exchange investors to gauge which currency they should side with based on the employment data in the report. Forex day traders, on the other hand, wait to see what the investors are going to be doing to start trading.
The Initial Moves
When the NFP is released, Forex traders begin to scan for the information that tells them which currency they should be purchasing. If the employment rate is lower than the last report and payrolls for non-farm workers increase, it is taken as indication that the dollar is going to be stronger than the euro.
Currency traders will begin purchasing dollars hoping that the value will continue to increase. If the employment rate increases and payrolls other than farmworker decrease, the traders view it as a weakening dollar and will buy into the euro.
Forex traders create price fluctuations as they buy and sell currency. Forex day traders create positions based on the price movements the Forex traders are creating.
Forex day traders wait to see what currency traders are going to do before establishing their positions and making trades. If currency traders begin buying dollars, day traders begin to take long positions. If the currency traders buy euros, day traders begin to take short positions.
All of this happens within minutes of the NFP's release. Prices may fluctuate in the first minute or two, but after a few they tend to stabilize into upward or downward movement.
Finding a Trade
To find a position to day trade the NFP report, traders need to establish criteria for entering and exiting and well as the position size they want to trade.
An example of finding the trade setup might be to use 30 pips. It's not unheard of for the EUR/USD to move 30 pips within the first few minutes after the report's release. The bigger the initial move, the better it is for establishing the direction the pair is going.
Once the initial large move occurs, there is usually a price pullback that signals an entry point. Using one-minute price bars, traders draw a trendline from the high of the initial move to the high of the price pullback one-minute bars (if the initial move was up). They buy when the price breaks above the trendline.
If the initial move was down, the same criteria is used to draw a trend line from the low of the initial move to the low of the price pullback. Traders enter a short trade when the price breaks below the trendline
Some traders like to wait 5-price-bars before drawing a trendline, while others might have experiences that tell them less or more is best. It also helps to place a stop-loss in case the price bar selected wasn't the actual price pullback low.
If a trader uses the 5-price-bar method, the stop loss should be placed one pip below the low of that movement if a long trade is taken. If the trade taken was short, then the stop loss should be placed one pip (plus the size of the spread) above the high that formed on the 5-price-bar movement.
To establish an exit position, or profit target, traders use the difference between the opening price and the initial move. The difference is cut in half. The target price is that number. For example, if the initial move was 115 pips, then the profit target would be 57.5 pips.
Risk, Reward and Position Size
Once you know your entry point, profit target and have placed a stop-loss, your can determine your trade risk and position size. The difference between your stop loss and entry is your 'trade risk' in pips. The difference between your profit target and the entry point is your 'profit potential' in pips.
Only take a trade if your profit potential is at least 1.5x your trade risk. Ideally, it should be 2x or more. In the examples above the profit potential is about 3x the trade risk.
Position size is also very important. Only risk 1% of your capital on a trade. That means your trade risk, multiplied by how many lots you buy, shouldn't be more than 1/100 of your account. For example, if you have $5,000 account, you can risk up to $50 per trade (1% of $5,000).
If the trade risk is 20 pips, then your position size should be no larger than 2.5 mini lots (that means taking a trade worth $25,000, which will require leverage). With a 2.5 mini lot position, if you lose 20 pips you will lose $50. If your position size is bigger than that, you will lose more than $50, which isn't advised for this account size.
Practice the Method Before Using It
It is impossible to describe how to trade every possible variation of the strategy that could occur. This is why demo trading the strategy, before live trading, is encouraged. Understand the guidelines and why they are there, so if conditions are slightly different on a particular day you can adapt and won't be frozen with questions.
Trade the strategy several times and understand the logic for the guidelines. That will make you much more adaptable, and you will be able to adapt the strategy to almost any condition that may develop while trading the aftermath of the NFP report.
You may also find that under certain conditions the target price isn't realistic for the movement the market is seeing. Depending on the entry price, the target may be way out of the realm of possibility, or it may be extremely conservative. Again, adapt to the conditions of the day.
If the profit target seems way out of wack, use a 3:1 reward to risk target instead. The goal is to place the target at a logical and reasonable location based on the trend and volatility. The profit target method helps do that, but it is only a guideline and may need to be adjusted slightly based on the conditions of the day.
The EUR/USD won't act exactly the same following every NFP report, it will take some practice to be able to see these trade setups play out, and be quick enough to jump in and trade them. Practice the strategy in a demo account until you are showing a cumulative profit after trading at least five NFP reports. Only then should you consider trading this strategy with real capital.