One of my favourite times in the month is the release of US Non-farm Payroll (NFP) data.
This is the data release that Forex traders most widely follow. It presents an opportunity to make quick pips. For this reason, I want to show you how to trade the monthly NFP report.
To help, I’ll use December 2016’s report as an example. By doing this, you should be able to trade the next NFP release and make some profitable trades!
What Is Non-farm Payroll Data?
Before I explore how to trade the monthly NFP report, it’s vital that you actually understand what the data means. You also need to know how it affects the financial markets and the price of USD.
An economy’s ability to keep unemployment low is a primary driver of growth.
Hence, developed economies measure the creation of new jobs along with the rate of unemployment. In the U.S., this measurement is done by The Bureau of Labor Statistics.
On the first Friday of every month, an employment report is produced. Within this report are various details about employment in the US for the preceding month.
One of these details is the Non-farm Payroll report.
It contains the total number of paid US jobs for the preceding month, excluding jobs in certain sectors such as farming and non-profits. This data is then used to determine how many new jobs were created or lost from the month before. Below is a graph from the Twitter account of The White House. It shows how many jobs have been added to the US economy month-on-month since 2008.
The total number of jobs created or lost is a key performance indicator for the US economy. That is why traders and investors attribute so much significance to the figure.
How To Trade The Monthly NFP Report: Getting To Grips With Forecasts
Ahead of the publication of a monthly NFP report, traders are able to look at forecasts from various commentators and analysts.Often a trader will have “favourite” source. This is a big advantage. Why? Because it produces a benchmark to judge the actual data by. Over the past few years the data has been subject to more and more revisions as it has become less “reliable”. These revisions are starting to rival the primary data in importance.
A figure which is higher than the consensus forecast is a positive sign for the US economy and usually causes the price of USD to increase. A figure which falls short of consensus usually results in a fall in the price of USD. This should be a major consideration when starting to trade “through the numbers”
The screenshot below is from ForexFactory and shows an example of how these forecasts look on a standard economic calendar.
How To Trade The Monthly NFP Report: December
Correlation between the data and the performance of the dollar may seem a simple matter. However trading profitably is a little more sophisticated than just following the headline number.
Take a look at the December 2016 report as an example
The report shows that an extra 156,000 jobs were added to the US economy in December 2016. This was a fall from 204,000 in November and missed the forecasted figure of 175,000.
You should assume from what I have said, that the dollar fell. However, this didn’t happen and the dollar actually rose.
The US Dollar Index, which measures the value of the dollar against the average value of other major currencies, actually reached intraday highs following the publication of the NFP report. The index opened Friday’s session at 101.67 and reached a high of 102.29 – reflecting a great opportunity when favouring the USD against other major pairs.
Read Economic Data In Context
Why did this happen?
As ever, the devil is in the detail.
There was additional data within the employment report that compensated for the lower than expected new jobs figure. An increase in the annual rate of wage growth, which hit a seven-year high. This is was pretty big news in itself, and more than cancelled out any negative impact from the headline data. It is important to understand that unemployment is historically low in the US. So while the NFP figure missed expectations, the data is sufficient to sustain growth.
The lesson to take form this example is that the headline gets the attention but the detail drives the market. The headline needs to be considered in line with the underlying economic situation and the other factors contained in the report. Consider the context and the big picture of the economic reality that the report is a part of.
Take Action
Using these principles, it is entirely possible to make a profitable start to every trading month. As I mentioned, the Employment Report is released on the first FRiday every month unless interrupted by a holiday. If you haven’t already done so, be sure to mark this down in your diary, as it certainly presents a trading opportunity.
Here’s a summary of what you need to do to potentially make profits:
- Mark the first Friday in the month in your calendar/diary as the day when the employment report will be published (13:30 GMT).
- Monitor the news for forecasts and a preview of the data ahead of the data release. Use an economic calendar.
- Consider the US Dollar Index upon the NFP announcement at 13:30 GMT, and be prepared to place a trade that takes advantage of the actual job creation data (while compensating for any competing economic data) and subsequent USD price movement. Remember, a reading above expectations usually mean an increase in USD price; below expectations, USD price usually falls.
- It would be sensible to have a a number of scenarios in mind that will speed up your decision process should the data comply with a certain scenario
I hope this article is useful for you. If you found it useful check out JarrattDavis.com.
You can also join a Facebook Group for more trading insights and analysis. It’s completely free to join and is a great place to talk to other traders for feedback or just sharing ideas. I regularly share my own trading insights with this community and share other useful resources, such as student case studies and videos.
