The Non-farm payrolls (NFP) indicator is the report on total salaried workers in the United States except agricultural jobs, government workers, nonprofit workers, and private domestic workers. Today it is a key economic indicator for the United States.
The publication of the NFP report causes very wide movements in the Forex market, which are among the largest movements produced by the publication of economic news. This is why many analysts, investors, speculators, and investment funds try to anticipate the result of the NFP and the movement it will cause. Due to this great expectation before the publication of this economic indicator, the market can react with wide movements even when there is no deviation between the forecast and the final result of the NFP.
In this article, we are going to discuss some trading aspects related to this economic indicator, especially to avoid the exposure to excessive risks due to the high volatility that the release of the NFP can cause.
The NFP release
The NFP is published, except in exceptional situations, on the first Friday of each month at 8:30 am Eastern Time. It is published by the Bureau of Labor Statistics of the United States Department of Employment. The Non-Farm Payroll published refers to the previous month, for example, the NFP published on Friday, August 6, 2020, contained the non-agricultural employment data for the month of July 2020.
The publication of this news creates a favorable environment for active traders since it is almost 100% sure that the market will have a highly volatile movement after the publication of the report.
Trading strategy for the NFP
The release of the NFP affects all major pairs but the best ones to trade at the time are, in my view, the EUR/USD and GBP/USD pairs. Any trader can trade the NFP due to one of the characteristics of the Forex market: it is a market that works 24 hours a day.
We will try to take advantage of the meaning of the NFP number released after the initial chaotic movements. At the time of the NFP release, intense movements of high volatility usually take place, once the market participants understand the meaning of the NFP number, the movements stabilize and there is a small consolidation after which the market will choose a direction. This is the price direction in which we want to enter the market. The consolidation period will be marked by an internal candle and the signal will be given by the breakout of this internal candle. In other words, we wait for a signal that indicates that the market has chosen a direction as a consequence of the NFP and we will enter in the direction of the dominant momentum. This will prevent entering the market too soon, reducing the probability that our trade will be closed with losses due to the high volatility of the market after the publication of the NFP.
Strategy rules
This strategy can be applied in 15 minute price charts. The rules are simple and are as follows:
- Do not enter the market in the candle formed just after the publication of the NFP.
- After the first candle, we wait for an internal candle to form. Remember: an internal candle is one whose maximum is less than the maximum of the previous candle and whose minimum is greater than the minimum of the previous candle, that is, an internal candlestick is “inside” the predecessor candlestick.
- We wait for the price to break the internal candlestick: When a candle closes above the maximum of the internal candle we will open a long position. If a candle closes below the low of the internal candle, we will open a short position.
- We put a stop loss of about 30 pips.
- If the open trade ends badly, we can carry out another trade in the same direction or in the opposite direction depending on the new signal generated regarding the internal candlestick. Never perform more than two trades if both end in negative.
- We close the trade 4 hours after our entry. Alternatively, you can use a trailing stop and stay in the market until the trade is closed by the stop loss.
Examples of the strategy
Example 1: GBP/USD, NFP for the month of July 2010, published on August 6, 2010.
Let’s see the image above. Point number 1 is the candlestick formed just after the NFP release, we are seeing a M15 price chart so this is a candlestick produced from 8:30 to 8:45 EST. According to the rules of the described strategy, in this candlestick, we will never do anything. The candlestick marked by number 2 represents the first internal candle after the publication of the NFP. The candlestick marked with the number 3 closes above the maximum of the internal candlestick (2) giving the signal for the long entry in the opening of the next candle. The position is closed in the candlestick marked with the number 4, 4 hours after the trade is opened, with 31 pips of profit.
Example 2: GBP/USD, NFP for the month of May 2010, published on June 4, 2010.
In the image above we see that the candlestick marked with the number 1 is an internal candlestick, but it is the first candle after the publication of the NFP and, according to the described rules, we will not take any action on this candle. The candlestick with number 2 is the first valid internal candle after the publication of the NFP. Candlestick number 3 closes below the low of the internal candle giving the signal for the short entry. We closed with 94 pips of profit in the candlestick marked with the number 4, 4 hours after the opening of the short trade.
As you have seen in the examples, it is an easy to follow strategy that can give benefits although, like any trading strategy, sometimes it will have trades that end with losses. Keep in mind that we are talking about trading a news with high impact in the market, that is why it is very important to use stop loss orders since we can see ourselves in the midst of high volatility and the market can go against a trade at amazing speed, even when the rules of the strategy have been followed exactly.
Another aspect in which this strategy falters is that, sometimes, the internal candlestick that gives the signal, can appear when the movement caused by the NFP is already exhausted; therefore, if the internal candle appears after a very wide movement, we should doubt the validity of the signal or take other tools to verify it.
In the following article you can learn another trading system designed to trade with the Non-Farm Payroll: Trading de NFP Report