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One of the most important economic news releases for the forex community is the US Department of Labor "Employment Situation" report which is widely known as nonfarm payroll or non-farm payroll report. The Bureau of Labor Statistics is in charge of this monthly report which indicates the month to month employment situation changes of those US workers who do not work for the farm industry. It also excludes people who work for the government, non-profit organizations who offer services to individuals, and private household employees.

Where to Get the Report

The most important part of the employment status report is the non-farm employment changes. For example -540,000 or -540K means that 540,000 jobs have been lost last month. If the number is 320,000 or 320K then 320,000 jobs have been created last month.

You usually need two numbers to make your decision about this report. The first one is available prior to the report which is the forecast for the upcoming report. The other number is the actual employment change which is released at 8:30 am when the report is out. Some traders also consider the prior month actual numbers to make a comparison between the two consecutive months.

You may refer to many news agencies such as Bloomberg or Reuters to get the old and forecast data. One easy way is to take the numbers from ForexFactory calendar. Locate the first Friday of the current or upcoming month on the calendar and look for the numbers in the Non-farm Employment Change row. The most important number is the one under the Forecast column.

You need immediate access to the actual number. This usually happens through your broker or a paid news service. If you are using your broker make sure that they release the news in a timely fashion.

Why NFP is an Important Report

The NFP report gives an idea of the healthiness of the US economy. It usually moves the Forex market significantly because of some unique features.

• NFP is published in a timely fashion. The Bureau publishes the report sharp at 8:30 am Eastern Standard Time on the first Friday of every month. Nobody from public knows about the report prior to the release. The sudden release of the report generates a spontaneous reaction from the market.
• The report is fresh. NFP is about what has happened in the past month so the data is fresh. Market does not have enough time to prepare itself for prior reaction.
• It is quite common to see clear differences between the forecasts and the actual numbers. Such differences come as a surprise. The market reaction to surprises is usually significant.
• It gets published when both North American and European markets are open. The huge number of participants at the time causes significant reaction to the report.

The unique features of this report make many Forex traders watch it closely and react upon it.

How to Trade NFP?

There are many methods for news trading. I provide you with two simple approaches below. I need to mention that no matter which method you choose there are a few things you need to keep in mind.

• News trading takes nerve. If you insist to trade news and especially NFP be prepared for unexpected and sudden movements.
• Be prepared upfront. At the time of NFP release you don't have that much time to think and act. You must consider every possible scenario upfront and have plans to cope with all possible situations.
• Not every broker is good for news trading and especially for NFP trading. Huge slippage and also getting re-quoted or frozen trading platforms are just some unwanted cases that could happen to you and your trades during the news release. Make sure that your broker is a good candidate for such trades. You may contact their clients and/or their dealing desk to know how they treat you at such times. Do not expect to receive honest answers from the dealing desk or their support team but you may at least get parts of the fact.
• NFP moves some pairs more than the others. Since this is a US economic indicator you need to trade USD pairs. Some common candidates are GBP/USD, EUR/USD, and USD/CHF. Back-test your strategy on several pairs. Pick the one that looks more profitable and less risky.

Fundamental Trading NFP

It is said if the employment change is positive then US dollar appreciates against other currencies and if negative USD depreciates. Appreciation of USD means that those pairs with USD being the base currency increase in value (such as USD/CHF) and those with USD being the quote currency decrease in value (such as GBP/USD). Trading on this basis is immature and could result in huge losses.

Although you have the option of comparing two consecutive months' results and base your trading on the relationship between the two numbers, one relatively more reliable approach is to consider the difference between the forecast value and the actual value. For example if the forecast value is -300K and the actual value is +120K then we could say that the market expected a depreciation in the value of USD and many traders have already gone short on this currency. The release of the actual data on the other hand shows an improvement in employment status which is a drastic change from the market anticipation. We, therefore, expect significant appreciation in the value of USD upon the release of the report.

A trader that uses this approach waits for the release of the news. If he/she notices such significant differences, enters the trade in the direction that market did not anticipate. For example in March 7, 2008 the forecast was +25K (positive) but the actual data was -63K (negative). Instead of an increase in the employment US faced a decrease in the employment numbers. The result was of course a decline in USD value against Great British Pound (see image). At the time of news release the GBP/USD slightly dropped (about 14 pips) but then it rallied 94 pips from the lowest point (remember that USD is the quote currency so a decrease in its value results in the GBP/USD rally).

If you trade with this approach you could have entered a long trade. The exact number of SL and TP could be set with the help of technical tools such as Fibonacci Retracement or Support and Resistance lines.

Technical Trading NFP

One simple approach to trading NFP is via straddling. You draw a horizontal line through the highest high and another one through the lowest low of the market in the past few hours or since it has entered a consolidation zone. Note that the market usually enters a sideways movement when approaches the NFP report. Then if the price crosses any of those lines you enter trade in the direction of the breakout. To be on the safe side you could enter the trade a few pips above the upper line or below the lower line to reduce the risk of false breakouts. The profit target could be equal to the distance from the lower line to the upper line. The SL could be the opposite line. For example if you enter a long trade from the upper line the SL would be the lower line (see image).

To make these trades happen you may place two pending orders and when one of them is filled cancel the other one. Another approach is to place a market order when the breakout happens.

Risks Involved in Trading NFP

There are several risks involved in trading NFP. Here are some of those risks:

• The price could move erratically in both directions. This especially happens if the forecast and actual numbers are very similar. If you place two pending orders they both could get filled and hit Stop Loss.
• Since the market at the time of breakout is usually illiquid your market order may not go through. It is quite common to get a requote or an entry price that you do not expect. Placing market orders are very risky. You may only place market orders if you know that your broker handles them the way you expect.
• You may encounter a huge gap at the time of news release. The gap could be from a few pips to hundreds of pips. If you have already entered a trade you may see the price has passed your Stop Loss and the trade is yet open. This is like a nightmare coming true.

In my humble opinion the best practice is to avoid news trading. If you insist to do that, make sure that you are fully prepared and have selected a good broker for this purpose. Also be prepared for huge losses or hopefully unexpected gains. The examples that have given here are among many possible scenarios. I strongly suggest that you back-test your trading method and also forward-test it on a demo account for a while. If you decide to go live, trade with little money the first few sessions.

Remember that most news releases have a temporary effect. The market could get back to where it was prior to the news release in a matter of a few hours or a few days. Do not expect to define the future direction of the market with the help of news effects. Click here for a blog post about this issue.

Risk Warning!

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