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.
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.