How does the non-farm payrolls report affect traders?

The non-farm payrolls report is arguably the most important market event. It provides an in-depth look in the overall health of the U.S economy and therefore it’s closely monitored and anticipated by forex traders as it can heavily impact the dollar, energy and gas industries and generate high bouts of market volatility.

How does the non-farm payrolls report affect traders?

The non-farm payroll (NFP)report is released monthly; on the first Friday of each month by the U.S Bureau of Labor Statistics. The report encompasses most of the U.S workforce excluding farmers, government and non-profit organization employees and includes key data regarding the U.S jobs market, unemployment rates and hourly wage growth.


Why is the NFP report so important for traders?

The non-farm payroll is such an economic indicator because it shows traders how the U.S economy is performing and can also help traders anticipate the Federal Reserve’s future interest rate decisions and monetary policy.

When the economy is performing well, companies are more likely to expand, hire more employees and increase wages. Subsequently, consumer spending will rise due to the increase in purchasing power, driving demand for more goods and services and therefore more workers to satisfy the increased demand.

A booming economy entices foreign investors, but if a growing economy gets out of hand it will eventually lead to inflation as goods and services become more expensive and the dollar loses its value.

This is why both the NFP and interest rates have such a strong impact on the financial markets and forex traders need to anticipate its release.


How to trade the NFP

Major economic events such as the NFP present some of the most profitable trading opportunities for traders because of the high market movements they provide. However, this volatility also increases risk exposure and traders need to ensure that they have a sufficiently funded account to sustain any losses due to the rapid market spikes.

If the actual numbers match the forecasted values there will likely be no impact to the market, but if the results are much higher or lower than expected, we can expect that the market sentiment will shift rapidly, causing either a surge in the same direction or a reversal of the price. It should be noted, however, that these huge spikes are sometimes an overreaction of the market to the results of the report and usually short-lived. As soon as the dust settles, the price will usually correct itself to normal values. As such, most traders will likely aim to predict whether the numbers will be positive or negative in order to gauge the market’s reaction to the news and position their trades accordingly.

If the NFP reports positive numbers, then the dollar is likely to rise which will inject higher volatility in all USD pairs – especially the majors. A healthy dollar also boosts the stock and indices markets as businesses will likely invest in further expansion. However, when the economy isn’t performing up to par then investors who are universally risk-averse generally turn to more stable assets such as gold and silver which are considered safe-haven investments albeit not as rewarding as more volatile asset classes such as forex and CFDs.


Volatility during the news

The NFP report is almost guaranteed to affect the markets either positively or negatively and some traders prefer to avoid trading altogether even up to a few days leading to the report’s release. In fact, liquidity usually dries up during such important news announcements as most traders start bracing for impact.

If you can afford to take the risk, or have solid risk management rules in place to eliminate any potential losses, the increased market volatility imparted by the NFP is one of the best opportunities to realize some gains due to the large market movements.

Some ways to reduce risk include limiting your position size and making sure that you always employ reasonably tight stop-loss and take-profit parameters along with your trades. The key here, however, is to strike a balance between risk and reward. If your stop-loss / take-profit orders are set too tight, then the rapid price spikes are likely to trigger your protective measures prematurely, and this is even more likely to happen during highly volatile events such as the release of the NFP.


Final thoughts

Trading during major news announcements is undoubtedly an attractive opportunity for traders as they can provide meaningful information regarding the future direction of an economy and its national currency.

Since the U.S dollar is the largest and most valuable currency in the world, economic indicators that can provide insight into its performance such as the NFP are an invaluable tool for forex traders and regardless if you are trading pairs that include the USD or not – you should aim to stay abreast of any new developments regarding the U.S economy.


Register now to learn how to trade the news and translate market movements into high yielding trades under the guidance of CM Trading’s trading specialists!

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Share on email

Recent .

Stock of the Week: Apple in huge demand, beats estimates by billions.

Stock of the Week: Apple in huge demand, beats estimates by billions. Apple beat estimates for quarterly earnings by billions of dollars. We look at …

Read More →
Stock of the week: Facebook makes CEO Mark Zuckerberg $8 billion in just one week!  

Stock of the week: Facebook makes CEO Mark Zuckerberg $8 billion in just one week!   It has been a momentous week for Facebook CEO Mark Zuckerberg who …

Read More →
Big Tech earnings roll in – Huge profits for Google, Microsoft and more! 

Huge profits for Google, Microsoft and more! Major big tech companies have released their quarterly earnings. We look at how some of the world’s biggest businesses performed so far this year!     Google, …

Read More →
MetaTrader 4 vs MetaTrader 5 – which is the better platform?
Bitcoin bounces back: Is buying the dip worth the risk?

Bitcoin bounces back: Is buying the dip worth the risk?  Bitcoin has recovered some of its losses following its fall from a record high of $65,000. Considering the crypto king’s astonishing performance in 2021, should …

Read More →
Oil summit: Waste of time
Oil market outlook: bumpy ride ahead?

2020 has been disastrous for the oil markets, however, it appears that oil has recovered most of its losses and is now hovering near pre-pandemic levels. In today’s article we will take a look at oil’s recent performance and explore the opportunities that may lie ahead.

Read More →
Dollar still on ten month lows while AUD gains
Stock Market Forecast: S&P 500, Dow Jones, NASDAQ Predictions and Analysis for 2021

With 2021 just around the corner, financial analysts are offering their outlook on where the stock market is headed in the coming year — and many of these experts are hoping for a bullish outcome. Read on.

Read More →