The Non-Farm Payroll (NFP) report is considered one of the most anticipated economic reports in the forex market. It is published on the first Friday of each month at 8:30 AM Eastern Time by the U.S. Bureau of Labor Statistics.
What is the NFP Report?
The Non-Farm Payroll (NFP) report provides a summary of the employment situation in the United States. The data release includes a number of statistics, not just the NFP (which is the change in the number of employees in the country, excluding farms, government, private households, property owners, 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 experience significant price movements in the minutes and hours following the data release. This makes it a great opportunity for day traders with the right strategy to capitalize on currency volatility.
The EUR/USD currency pair is the most traded in the world, typically offering lower spreads and ample price movement for trading. This is due to the currency price fluctuations being sufficient to provide an opportunity to profit from the movement of this currency pair without worrying about other currencies.
Forex market investors use the NFP report to determine which currency to align with based on the employment data in the report. In turn, day forex traders wait to see what investors will do to start trading.
Initial Movements
When the NFP report is released, forex traders begin looking for information that tells them which currency they should buy. If the employment rate is lower than the previous report but non-farm wages have increased, it is considered a signal that the dollar will be stronger than the euro.
Currency traders will start buying dollars in hopes that its value will continue to rise. If the employment rate rises and non-farm wages fall, traders view it as a signal of dollar weakness and will buy euros.
Note: Forex traders create price volatility when buying and selling currencies. Day forex traders create positions based on the price movements made by currency traders.
Day forex traders are waiting to see what currency traders will do before establishing their positions and making their trades. If currency traders begin buying dollars, day traders start taking long positions. If they buy euros, day traders begin taking short positions.
All of this happens within minutes of the NFP report release. Prices may fluctuate in the first minute or two, but after a few minutes they usually stabilize in an upward or downward movement.
Finding a Trade
To find a position for trading the Non-Farm Payroll (NFP) day, traders need to set criteria for entering and exiting the trade, as well as the position size they want to trade.
An example of finding a trading setup can be using 30 pips. It is not uncommon for the EUR/USD currency pair to move 30 pips in the first minutes after the report is released. The larger the initial movement, the better it is for determining the pair’s direction.
Once the significant initial movement occurs, there is usually a price contraction indicating an entry point. Using one-minute price bars, traders draw a trend line from the top of the initial movement to the highest of the one-minute price bars (if the initial movement is upward). A buy is made when the price breaks above the trendline.
If the initial movement is downward, the same criteria are used to draw a trend line from the lowest of the initial movement to the lowest of the one-minute price bars. Traders enter a short position when the price breaks below the trendline.
Preferably,
Some traders wait for 5 price bars before drawing a trendline, while some may have experiences that tell them that less or more is better. Setting a stop-loss also helps in cases where the chosen price bar is not identified as the lowest point of contraction.
If the trader uses the five price bar method, they should place the stop-loss one point below the lowest movement if a long position is taken. If a short position is taken, the stop-loss should be placed one point (plus spread size) above the highest point in the five price bars movement.
Profit Target
To determine the exit position or profit target, traders use the difference between the opening price and the initial movement. The difference is halved. The target price is this number. For example, if the initial movement is 115 points, the profit target will be 57.5 points.
Risk and Reward and Position Size
Once you know the entry point, profit target, and stop-loss placement, you can determine the trade risk and position size. The difference between the stop-loss and entry point is the “trade risk” in points. The difference between the profit target and the entry point is the “potential reward” in points.
Only make a trade if your potential reward is at least 1.5 times the trade risk. In fact, it should be 2 times or more. In the examples above, the potential reward is about 3 times the trade risk.
Position size is also very important. Only risk 1% of your capital on a single trade. This means that your trade risk, multiplied by the number of contracts you buy, should not exceed 1/100 of your account. For example, if you have a $5000 account, you can risk up to $50 per trade (1% of $5000).
If the trade risk is 20 points, your position size should not exceed 2.5 mini lots (which means taking a $25000 position, which would require leverage). With a mini lot position size of 2.5, if you lose 20 points, you will lose $50. If the position size is larger than that, you will lose more than $50, which is undesirable for this account size.
Practice the Method Before Using It
It is impossible to describe how to trade in every potential nuance of the strategy that can occur. For this reason, it is encouraged to practice the trading strategy in a demo account before real trading. Understand the guidelines and the reasons behind them; even if the circumstances differ slightly on a given day, you can adapt and not freeze with questions.
Trade the strategy several times and understand the logic behind the guidelines. This will make you more adaptable, and you will be able to adjust the strategy to any conditions that may develop during trading after the NFP report.
You may also find that the profit target seems unrealistic for the visible market movement under certain conditions. Depending on the entry price, the target may be too far out of reach or might be overly conservative. Again, adapt to the conditions of the day.
If the profit target seems unrealistic, use a risk-to-reward ratio target of 3:1 instead. The goal is to set the target in a logical and reasonable position based on the trend and volatility. The profit target method helps in doing this, but it is just a guideline and may need slight adjustments based on the day’s conditions.
The EUR/USD currency pair will not behave exactly the same way after every NFP report; you will need some practice to be able to see these trading setups and be confident in jumping in and trading them. Practice the strategy in a demo account until you show cumulative profits after trading at least five NFP reports. Only then should you consider trading this strategy using real capital.
Questions
Repeated
When is the Non-Farm Payrolls Report published?
The Non-Farm Payrolls Reports are published at 8:30 AM Eastern Time on the first Friday of each month.
Why are Non-Farm Payrolls important?
The Non-Farm Payroll numbers give economists an idea of the health of the labor market. For day traders, the Non-Farm Payroll Reports are significant as they are considered a catalyst for volatility. As one of the most anticipated news reports, NFP reports can ignite market volatility in either direction.
Source: https://www.thebalancemoney.com/day-trading-the-non-farm-payrolls-report-4061427
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