Trader's Guide To The NFP

Among the wide range of economic data points released each month, the NFP or Non-Farm Payrolls, stand out as one of the most important releases. Each month, millions of traders round the globe keenly await the release of this data, which attracts a huge amount of attention from both institutional and retail traders alike. However, what if you are just getting started in the market and you have no clue what the Non-Farm Payrolls are, least of all how to trade them? Fear not, read on as we decipher this mystical market mover and explain exactly what it is, why it's so important to traders. Well also look at some tips and tricks on how to trade it, and a few pitfalls to watch out for.

Ok so, first off – what is the NFP?

The NFP is essentially a labour market indicator in the United States which measures the growth (or decline) in jobs. The only exclusions to the jobs measured are in farm work (obviously), military and intelligence work, self employment or employment in private households and proprietors.

When is it released?

Unless there's a holiday in the US and the schedule gets messed up, the NFP is always released on the first Friday of each month at 8:30AM EST or 1:30PM GMT time. We've also included a table below for the remaining NFP releases of 2020:

Why is the NFP So Important?

The NFP, which measures the growth/decline in US jobs, is seen as key indicator of the health of the US economy. Given that the US economy is still the largest in the world, the release is seen as a pretty big deal.  So, if the NFP comes in strong, this means that the US economy is in good health and if the NFP is weak, this means that the economy is in poor health. Now, obviously you need a whole bunch of other indicators such as inflation, manufacturing, GDP etc to make a full diagnosis of the US economy, but as a rule of thumb, that is how the NFP is interpreted.

Why is the NFP Important to Traders?

So, as we touched on above, the NFP gives an insight into the health of the US economy. This is very tradable information.  The NFP is watched by the Fed (which is the US central bank responsible for setting monetary policy). Generally speaking, a strong NFP release encourages the view that the economy is growing and as such, the Fed is likely to be looking to tighten monetary policy. This leads to investor inflows into the USD, causing it to strengthen. So, typically, when we see a strong NFP we see traders buying USD in anticipation of the dynamic. Similarly, when the NFP is weak, this means that the economy is contracting and suggests that the Fed is likely to be looking to loosen monetary policy. This typically leads to investor outflow from USD, causing it to weaken. So, when we see a soft NFP print, we typically see traders selling USD in anticipation of this dynamic.

How to trade the NFPs

Ok, so as we just introduced then, there are a couple of basic ways for trading the NFP. But, first of all we need to clear up what is meant by a strong reading or a weak reading. Each month, when the data is released, it is released alongside a market estimate, which is made known a few days before. This information can be found on your economic calendar.

For, example, the NFP might be forecast to print 150k this month. On release, they print 170k, which is a strong reading because it has beaten the estimate. If the reading was 140k it would be a weak reading because it undershot the estimate.

Picking A Pair To Trade

So, the general rule of thumb is that if the reading is strong, traders look to buy USD. If the reading is weak, traders look to sell USD. Typically, the best way to do this is in a pair where the other currency is weaker against USD due to monetary policy divergence.

For example, if the Bank of England is expected to announce a rate cut soon and we see a stronger than expected NFP, the divergence between the Fed and the BOE will cause a strong spike lower in GBPUSD.

Risks

Many traders see the large moves in the NFPS each week and believe that they can make money from “jumping” on the move as it happens. However, this is an incredibly high risk strategy and very rarely works in the traders favour. The actual spike in reaction to the news happens in low liquidity, often with very wide spreads meaning that it is easy to get slipped on your trade entry by a large amount. Furthermore, the volatility means that any move in your favour can reverse sharply very quickly. It is better to be positioned either well ahead of time, in anticipation of either a stronger or weaker reading, or to wait until some time after the release.

Trading the NFP can be very lucrative indeed, and exceptionally strong or weak readings have the potential to spark large moves which can last for days at a time or more. Remember when trading to always use a stop loss and be careful with your position sizing to make sure your risk level is appropriate for your account.

If you'd like to try trading today's NFP, try it with our Demo Account!

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.