Non-Farm Payrolls trading: Seven top tips every forex trader needs to know


  • The US Non-Farm Payrolls is the No. 1 event on the forex calendar.
  • The volatile nature of the reaction requires a special response.
  • Here is what you need to know before jumping on a trade on the first Friday of the month.

Employment figures are closely watched by the public, politicians – and central banks – which move currencies. The US is the world's largest economy, and its jobs report has more impact than labor market numbers from other countries. The US dollar is traded in 87.6% of global foreign exchange trades, with the euro a distant second with 31.4%. 

Moreover, the Federal Reserve, America's central bank, is mandated to foster full employment – in addition to the traditional role of maintaining price stability. Therefore, the Non-Farm Payrolls report on the first Friday of the month has more impact on the greenback and broader markets more than any other event.

The top event has several rules of its own. 

1) The best reaction is in USD/JPY

While many forex traders prefer other currency pairs to dollar/yen, it often provides the most straightforward reaction. The Japanese yen rarely moves in response to Japanese events – leaving most of the impact to the dollar side of the equation. 

In times of crisis, the commodity currencies and also the euro and the pound react differently. When US data beat expectations, these currencies may gain against the US dollar as the market mood improves – counterintuitively. Investors are relieved that the US economy is growing and hope to make better gains elsewhere – a relief rally.

However, when US data falls short of expectations, the gloomy mood draws flows into the safety of the greenback – once again, contrary to intuition. 

On the other hand, the Japanese yen is the ultimate safe-haven currency, beating the USD in this role. When US data exceeds expectations, the straightforward desire to flow into the USD coincides with the lower demand for the yen.

And when the US economy suffers, the yen is considered the best shelter – pushing USD/JPY lower – in line with logic.

However, it is often difficult to gauge if we are in times of crisis or not. Therefore, USD/JPY provides the best reaction regardless of the markets' swinging mood.

2) The initial reaction is not necessarily the correct one

Every trader that has witnessed one NFP release knows that trading is choppy. Liquidity vanishes ahead of the event, allowing small positions to alter the price at a fast clip.

The initial knee-jerk market reaction may not be the correct one. It can take several seconds to several minutes for a narrative to develop. 

3) Wages may overshadow the headline number

The headline gain or loss in American positions used to be the single most important figure of the month. However, average hourly earnings, or wages, often take the front seat. As the economy nears full employment, markets and the Fed would like to higher inflation stemming from more disposable income in Americans' pockets.

Salary growth becomes more prominent when the headline figure meets expectations, and it can even overshadow it by moving the price in the opposite direction to the headline NFP. This phenomenon sometimes explains the previous tip.

4) Technical levels may be broken too easily

Traders that have placed limit, stop-loss, or take-profit orders according to well-thought technical analysis are wise to remove them ahead of the release. Even if the trading system is perfectly designed, the rules are thrown away when the NFP storm arrives. 

The high-profile of the event and the lack of liquidity mentioned earlier are the culprits. The same levels may reapply after the dust settles – usually 30 minutes after the publication. However, even if you are uninterested in trading the event, you should know when it is due and prepare to remove orders or trades.

5) Use low leverage

High leverage is never recommended, and traders should be extra prudent when trading the NFP. Inferior liquidity and the potential quick breach of critical technical levels may cause rapid moves.

While many traders are in search for high volatility and are excited by the US jobs report, a fast move in the wrong direction on a highly leveraged trade may wipe out the account. Unfortunately, margin calls on the first Friday of the month are too frequent.

6) Use wide stops

Apart from lowering the leverage, there is another way to defend against rapid price action – wider stops than usual. And yes, this also applies to take profit levels. Both losses and profits – in terms of pips – are enhanced by the NFP price action.

It is always essential to maintain a healthy risk-reward ratio and return to narrower stop loss levels after the NFP is over. On the Monday after the US jobs report, leverage can be returned to normal levels as well.

7) Not for beginners

Given all the previous reasons, total newbies to forex trading may be advised to pick other times to trade currencies – waiting to gain experience before jumping into the game.

However, if you are a beginner and have reached this point in the article, do not be depressed. Watching the NFP play out may still prove useful for future trades – the next NFP or any other news-related event. After observing the release and the price action from afar, you may opt to trade the upcoming release on a demo account before moving to trade on a live account. 

Conclusion

The US Non-Farm Payrolls is a special event on the forex calendar that requires special care. USD/JPY tends to be the best pair to trade the NFP that also consists of wage numbers, may blow out technical levels, calls for lower leverage, wider stops, and is generally volatile with the initial reaction often "tricking" traders. 

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