NFP Trading Strategy – The Knee Jerk Reaction

nfp trading forex

Learn the NFP trading strategy and profit from one of the biggest market-moving risk events. We use unique NFP trading forex patterns to capture pips when everyone else is afraid to enter the market. This trading guide will explain what is NFP in forex trading, how to trade it, what currency pairs to trade and some valuable trading tips and tricks.

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In Forex trading, NFP day is viewed as the most feared day of trading, but it doesn’t have to be this way. This day is typically characterized by increased volatility. We only fear things we don’t understand. But, once you get a grasp of the real NFP trading meaning, you’ll be able to trade more confidently.

We’ll teach you how to trade the Non-Farm Payroll report without getting whipsawed by the crazy volatility. Our NFP trading strategy combines unique trading patterns that work with the volatility created by the NFP data.

Moving forward, we’ll explain what is NFP in trading and everything you need to know so you can turn the odds in your favor when you trade the Non-Farm Payroll report.

See below:

nfp forex trading

The NFP report is a key piece of economic data that measures the number of new jobs added during the previous month. The NFP number only includes all non-agricultural business within the USA. The NFP data excludes farm employees, private household employees, government employees and employees of nonprofit organizations.

In other words, the NFP indicator is a good measurement of the performance of the US economy.

Now you’re probably asking yourself:

“What does NFP trading mean?”

NFP is a three-letter abbreviation that stands for Non-Farm Payrolls.

The non-farm payroll figures are released by the US department of labor.

The next important thing to know is when is the NFP report data released?

The NFP trading time is normally at 8:30 AM EST (or 1:30 PM GMT) on the first Friday of the month.

Now that you’ve learned more about what is NFP trading, let’s outline why you should start trading the NFP.

what does nfp mean

The NFP is the most important economic data release in the world because it’s watched not only by pro forex traders but also stock traders, futures traders, and top options traders.

All asset classes, including currencies and stocks, are going to be impacted by the NFP release.

You might be asking yourself:

“Why NFP in forex trading is so important?”

The answer is very simple:

The US is the biggest and most important market in the world. When the American Dollar moves, all other global assets will also move in response.

The payroll figures can change significantly month on month due to its correlation with economic policy decisions made by the US Federal Reserve.

The NFP figures are closely watched by traders from around the world. Any changes in the market participants’ opinion have the potential to trigger volatility in the markets. In trading, volatility spells more trading opportunities and bigger profit potential.

As you can imagine using an NFP trading system that exploits volatility can be extremely profitable.

However, on the day of the NFP, you need to be cautious especially if you’re a short-term trader, as with higher volatility strategy also comes bigger risks.

We’ll outline how to trade the NFP report, more precisely how to interpret the most important numbers in forex trading.

Generally speaking, a high reading of the NFP data is seen as positive for the US economy. So, stocks and the US dollar should benefit from it. At the same time, a low reading is seen as negative for the US economy.

However, more often than not things don’t go as per the text-book rules.

We also need to factor in other factors like the market expectation and other unknown variables which is the actual release.

But then how to trade NFP?

First, you need to understand how to properly read the NFP report.

For this, let’s consider the NFP report from the figure below:

nfp forex calendar

The typical NFP report will include more than just the nonfarm payrolls.

The Nonfarm Payrolls report also measures the month to month change of the:

  • Unemployment Rate.
  • Private Payrolls.
  • Participation Rate.
  • Average Hourly Earnings.
  • Average workweek.

Usually, leading up to the actual NFP release there is going to be a consensus view (forecast) of what the NFP numbers should be. Obviously, if the actual NFP numbers end up being above the expectation, it signals a stronger economy and subsequently, the dollar crosses should benefit.

On the other hand, if the actual NFP figure is below the consensus, it signals a weaker economy and subsequently, the dollar should be hurt.

The market is going to adjust in price according to the actual NFP numbers.

So, as you can imagine, the bigger the NFP miss, the bigger the market will spike.

Whatever the NFP numbers are going to be – above, below or in line with the market expectation, the market is going to adjust in price according to that data

Let’s see what the best currency pairs to trade the NFP are.

The best-moving currency pairs to trade during the Non-Farm Payrolls are the US dollar crosses, namely the major currency pairs like EUR/USD, GBP/USD, AUD/USD, or USD/JPY.

The minor and exotic currency pairs can also print an increase in volatility during the NFP release, however, the other crosses tend to have unpredicted price reaction.

For example, see how GBP/USD (left) reacted to one of the latest NFP releases compared to GBP/AUD (right).

See the forex chart below:

nfp trading forex

The GBP/USD pair had a substantial price movement as compared to the GBP/AUD pair, which barely moved. This happens because the GBP/AUD is a synthetic pair formed by GBP/USD and AUD/USD which blocks GBP/AUD from moving much as both GBP/USD and AUD/USD will weaken (strengthen) at the same time depending on the NFP data.

In summary, if you focus on the major currency pairs, you’ll be just fine.

We’re going to show you how to trade NFP forex the safe way. You can also check out our blog on the safest options strategy.

You need to be careful during the NFP forex event because a lot of the time your position might be whipsawed and get stopped out. That’s why you need to prepare to face different market scenarios.

There is no one-size-fits-all solution in NFP trading forex.

You’ll not be able to use the same NFP trading strategy because the price action will behave differently with each data release.

In today’s guide, we’ll cover 3 different NFP trading strategies and an advanced approach.

Trading Ahead of the NFP Report

For this type of NFP trading strategy, we use a short-term time frame because the main goal is to scalp the market for a quick profit. NFP is a great source of volatility and usually causes big price swings.

Maybe you don’t like to get into the NFP trading economics, then the best way to get started trading the Non-Farm Payrolls is to focus only on the price action.

Here is a step-by-step guide to day trading NFP using only the charts:

  1. 15 minutes before the NFP release, mark on your chart the high and the low of the last 4-hour trading range.
  2. Place a limit buy order above the high of the range and a sell order below the low of the range.
  3. A protective stop-loss order is placed on the opposite side of the range for both orders.
  4. Wait for the NFP to trigger one of your orders.
  5. Remember to cancel the other pending order once you have an open position.
  6. As for the take profit, use a price target that is equal to the trading range identified in step 1.

See the trade example below:

nfp trading

The second NFP trading strategy you can use is to trade “the fade”.

See below:

NFP Trading the Fade

In forex trading, NFP fading is to open a trade in the opposite direction of the initial release reaction. The idea behind this NFP strategy is to wait for the initial spike and then trade what happens after it.

This NFP trading strategy works because most often the initial NFP spike is just a knee-jerk reaction.

This is how you can interpret the NFP knew-jerk reaction:

Based on the actual release, traders will overreact, jump in and out of a trade which in turn will create this heightened activity. However, after the dust settles and the market participants digest the new NFP figures, traders will reassess their positions and will either take profit or cut losses. This in turn will cause a temporary retracement that creates a short-term trading opportunity for us.

Take a look at the recent NFP release:

  • USD/JPY shoots up on the initial release.
  • At one point the market reaches a plateau (overbought reading), at least in the short-term.
  • Profit-taking takes place or losses being taken and the pair starts to drop.
  • Trading the fade is what we want to trade.

See the forex chart below:

nfp forex news

We don’t want to normalize fading every NFP spike because that’s a recipe for disaster.

As a general rule, we only look to fade spikes into key technical levels like previous swing high/low. The trading secret we use is to look for key levels on higher TF but manage the trade on intraday time frames.

We’re going to examine the NFP trading strategy that is reserved for swing trading options.

Swing Trading NFP

NFP trading can also be extremely lucrative for long term trends in the market.

This approach can be fruitful but you need to be patient.

A lot of the time the unemployment numbers can have an impact on the long-term trends. NFP is a strong driver in the forex market that has a much profound impact on the price action than the initial reaction. Often times the price will follow through in the direction established by the NFP.

As a general rule, Friday’s NFP can give us strong clues whether the current month is going to be bullish or bearish.

If in the next trading day, we break above Friday’s high there is a pretty high chance the pair will be bullish for the entire month.  Conversely, if the next trading day, we break below Friday’s low there is a pretty high chance the pair will be bearish for the entire month.

See the forex chart below:

how does nfp affect forex

As you can tell once Friday’s NFP high/low was broken in most cases the GBP/USD strategy pair continued to trade in the direction of the breakout.

A simple strategy will be to simply place a buy limit order above Friday’s high and a sell limit order below Friday’s low.

Or, you can easily use this information along with your own strategy to keep you on the right side of the market.

In summary, the Non-Farm Payroll report can present short-term trading opportunities as well as long term potential profits. For day traders, NFP trading forex can be the source for more trading volatility and subsequently the potential to realize quick gains. For the swing traders, the NFP trading strategy can be used to determine the market bias for the month ahead.

Here is a short recap of the NFP trading strategies you have learned:

  • Trading ahead of the NFP report using the price range established prior to the release.
  • Fading the knee-jerk reaction.
  • Swing trading NFP.

Practice these NFP trading techniques with a demo account before you put at risk any of your hard-earned money.

Thank you for reading!

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