Unemployment Rate and Nonfarm Payrolls. Why Is This So Important for the Markets
This article is about the nature of one of the most potent fundamental indicators, Nonfarm payrolls.
Trade on the NFP release
2023-05-12 • Updated
Introduction
The level of non-farm employment change, also known as the non-farm payrolls or the NFP is one of the most high-valued indicators in the economic calendar. Traders and investors give it the same level of importance as to the monetary policy meetings and speeches by the heads of the central banks. This indicator makes the market very volatile, and you can create a profitable strategy based on it. FBS analysts will explain to you what strategy is more suitable for trading NFP.
What are the non-farm payrolls and when they are released?
Non-farm employment change represents the change in the number of employed people during the previous month, excluding those who work in the farming industry. The more people are employed, the better the economic conditions are. If the economy is growing, companies hire more people. When people get jobs and stability, they start to spend their additional income and therefore, it boosts the economy. On the other hand, unfavorable economic situation drives firms to employ fewer people and even fire some of their workers. Thus, people lose their income and start to spend less money. It reduces the overall consumer spending and, as a result, the economy slows down.
As a result, the indicator serves as a base for the future rate decision by the Federal Reserve. The high level of the indicator increases the possibility of more rate hikes in future, on the other hand, the decline in the NFP figures raises concerns about the economic slowdown and reduces the number of projected rate hikes by the Fed.
The level of the US NFP usually releases on the first Friday of the month alongside the levels of monthly average hourly earnings and unemployment rate. You can check the time of the next release in the economic calendar.
What to trade?
As the NFP is the American indicator, it will definitely affect the US dollar. Some analysts suggest choosing either GBP/USD or EUR/USD for trading. However, the EUR/USD pair tends to be more volatile on this release.
Trading ahead of the NFP release
As it is a widely expected event, we can see that the volatility goes down before the NFP is published. It is recommended to stay out of the market during the early Friday trading hours, as you may be affected by the sudden changes in volatility.
Easy short-term NFP trading strategy
For this type of strategy, we use a 5-minute chart. Let’s look at the following steps.
- Step 1: 30 minutes before the NFP release, open the chart and find the highest high and the lowest low for the last four hours.
- Step 2: Place two pending orders on both sides: a buy pending order at least 5-10 pips above the highest high and a sell pending order 5-10 pips below the lowest low in that range.
- Step 3: Place stop losses on both sides: your stop loss for a long position will be a sell pending order and vice versa.
- Step 4: Wait for the news to get released and it will activate one of the pending orders. Do not forget to cancel your another pending order.
- Step 5: It is recommended to set a target price the same size as the distance between the high and the low. You can use these formulas to determine the target:
Buy order + (the high before the release – the low before the release)
Sell order – ((the high before the release – the low before the release))
- Step 6: Enjoy the profit.
Example
On the 5 minute chart for EUR/USD, we determine the high at 1.1384 and the low at 1.1362. We open a buy pending order at 1.1389 and a sell pending order at 1.1357. Then we place stop losses: the stop loss for the long position is placed at 1.1357, while the stop loss for the short position is at 1.1389. After the release, we see the large bullish candlestick, which shows the strength of bulls. We place take profit at 1.1411 and cancel the short order. After that, the price immediately started to decline. We earned +22 pips.
Conclusion
The strategy explained above allows to maximize your profit and reduce the risks during the increased volatility. It will help you to trade EUR/USD much easily during the NFP release.
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How to trade the news?
The financial events are typically scheduled ahead of time. There are usually predictions ahead of the release (Forecast column in our Forex news calendar) of how it will affect the market. Some traders choose to open positions depending on their expectations of economic indicator reports: if they expect a particular indicator to move the currency up, they buy it and vice versa. Other traders dislike rapid price movements that may happen when indicators are released, so they steer clear of using the FX calendar and trading the news.
There are many news trading strategies: you have to use the one you find best suited for your trading style. FBS, apart from providing all the necessary services for trading, also have all the vital information for any trader's needs. Check out our news section to be aware of possible market movements.
Even if you are not one to trade the news, you should still check the trading economic calendar or read about current economic events regularly because they are likely to affect market volatility.
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What economic indicators are there?
Economic indicators are major economic events that are used to interpret investment opportunities in Forex trading. They usually are macroeconomic events that affect currencies and stock prices.
The indicators can be leading (predict upcoming changes), coincident (show the current economic state of the particular area) and lagging (confirm patterns and trends).
Top economic indicators:
- The US Treasury Yield Curve – shows the ratio between short-term Treasury bills and long-term Treasury bonds. This indicator successfully predicted eight major recessions of the past years.
- GDP (Gross Domestic Product) – one of the most critical metrics of the economy's health. It is a lagging indicator, so it shows what has already happened, but can be a great marker of an upcoming recession.
- Unemployment Rate – this is a percentage of people seeking jobs and will indicate how healthy the labor force and, thus, the economy really is.
- Interest Rates – another lagging indicator that shows economic growth. It can affect GDP and inflation, so be aware of this one.
These are some of the few important indicators. Make sure to follow our daily trading plans from FBS analysts to learn more about the current trading news events and how they will affect your Forex trading.
