What is forex NFP? How does NFP affect forex? These are questions that have been coming a lot lately. Many people want to know how to trade the forex Nonfarm Payrolls.
The question is, are you ready to trade the Forex NFP?
The reason I am asking this question is because many beginner traders that I have seen blowing their account, do it during the NFP week.
Most traders have the tendency of indulging into trading practices that they are not aware of because they have heard someone else talk about it, and how profitable it can be.
Before you decide on indulging in some practices, first make sure that you are well educated on what it is all about and how it works.
This will save you a lot in terms of your trading capital and living a stress-free life as a trader since you minimize the level of emotions that you have while trading.
What is forex NFP
The Nonfarm Payrolls (NFP) entail some of the biggest market movers in the forex markets and maybe the most-watched Forex news piece, together with central bank events or decisions revolving around interest rates.
However, the NFPs’ effect appears to be decreasing in the last few months.
During the first Friday of each month, the U.S. Bureau of Labor Statistics issues the statistics for new job creation in the US, together with other relevant labor market data.
The data comprises of all the paid workers and does not include government staff, private homes, non-profit organizations, and the farming industry.
The nonfarm payrolls report gives some information concerning inflation and the economic growth rate too.
As a result, it is a key sign of the progress of the US economy, and investors follow this report very keenly.
Surprises and main changes in the issued statistics can quite easily lead to important price movements in the forex market.
This article will show you the importance of understanding the consequences of this statistics release, how to simplify and interpret the numbers as well as how to generally trade forex NFP.
Importance of NFP Data in Forex
Now that you know what is forex NFP, I can go ahead and outline the importance that the NFP data has in forex trading.
The significance of nonfarm payrolls data comes from the fact that the U.S. is the largest economy in the world, and the U.S. dollar is taken to be a reserve currency.
Countries around the world pin the value of their national currencies to that of the reserve currency.
Numerous goods such as gold and oil are also priced using the U.S. dollar.
The Nonfarm payrolls report, thus normally moves all of the financial markets, including forex, commodities, equities, treasuries, and interest rates.
The effect is usually felt as soon as the announcement of the NFP data is made.
In some cases, it moves the market move drastically. With time, the effect tends to slow down a bit, but the nonfarm payrolls tend to gather so much attention.
The NFP data issued basically creates important monthly trends.
The currency pairs that are mainly affected directly by the Nonfarm payrolls data announcement are the major currencies that are normally traded against the USD. They include:
The major currency pairs are where you will experience the purest reactive response from the NFP data release.
They provide forex traders with the best chances for trading the NFP in the forex market.
USDJPY and EURUSD usually tend to experience the greatest impact with regards to the release of the nonfarm payrolls report.
Knowing what is forex NFP and having an idea of the pairs to look at would be good for a trader that intends to trade the NFP report.
It would be bad that you know what it is all about, but you end up focusing on the wrong currency pairs.
How Currencies are Affected
The basic response that is seen from such currency pairs is that a strong NFP number is USD positive, and therefore, the USD rises against the other major currencies.
In case the Nonfarm payrolls data is weak, the other pairs tend to gain momentum against the USD.
The NFP Report’s Impact on the Forex Market
Nonfarm Payroll releases can turn into reasonable forex volatility, although not necessarily.
In the event where everyone expects an NFP reading of 150,000, and the following scenarios were to unfold,
- Published data shows 200,000 new jobs
- Published data is per the consensus
- Published data shows 100,000 new jobs
From the second case (shown above), the forecast is consistent with the consensus; thus, everything is already priced into the market. Theoretically, the forex market is likely to keep calm in this scenario.
In comparison, the other two scenarios were unprecedented.
In the third scenario, everyone anticipated there would be 150,000 newly created jobs, whereas the NFP report only indicated 100,000.
This reading would possibly have a negative effect on the US dollar since a weak labor market means:
- Lower inflation
- Poor economic growth
- Less pressure to increase interest rates
As a result, many people would be looking to sell the US dollar in favor of the other currencies.
By contrast, a reading of 200,000 new jobs would have the opposite impact; the USD will begin to strengthen, and everyone will be looking to buy it.
These actions are the ones that bring about the price movements for forex traders.
The chart above shows an example of what happens to the USD currency pairs when the NFP data released is worse than it was expected.
How to Trade the forex NFP
Having information on what is forex NFP would not be complete without having an idea of how to trade the Nonfarm payrolls report.
Notwithstanding the fact that the market is specifically subtle to the forex NFP release, it constantly results in tradable moves in the forex market.
Additionally, because most of the market members are focused on interpreting the NFP report, it generates a good environment for active traders.
When trading the forex NFP, waiting for the market to price-in the information, as compared to guessing on the directional movement of the market, can offer a better outcome.
After the first reaction lessens, the market will show what the numbers really mean for the economy.
Getting into a trade, following wild swings, can enable capitalization on the direction of the dominant market momentum.
The main purpose for this is to try and capture rational, more continuous movements after the announcement and decrease the probability of being stopped out by the whipsaw movements that come as a result of the irrational volatility that infuses the first few minutes after a release.
As I always tell my students, at no given time, should you try to predict the direction of the market.
Always watch the market and let it give you an idea of the direction it is headed. This way, you will avoid a lot of losses that come with irrational swings or pullbacks that end up hitting your stops, and then the market moves in your direction.
Patience is a virtue in forex trading, and it pays big in the long run. The fear of missing out on a trade will always result in the making of irrational decisions.
When trading the Nonfarm payrolls report, do not attempt to guess the direction of the market by trying to interpret the NFP data.
Let the market do the work for you, and only enter a trade that has an entry signal going hand in hand with your existing trading plan.
Additional Information when Trading Nonfarm Payrolls Report
Here are some tips to recall when using forex NFP data releases to inform your forex trading:
- NFP data is released on the first Friday of each month.
- The NFP data release is supplemented with increased volatility and widening spreads.
- Currency pairs not linked to the US Dollar could also experience increased volatility and widening spreads.
- Trading the NFP data release, as a result, can be risky because of the increase in volatility and possible widening of spreads. To fight this, and to avoid the prospect of being stopped-out, it is good to use the appropriate leverage or no leverage at all.
I hope you are now aware of what is forex NFP and how to approach the market if you intend to trade the Nonfarm payrolls report.