Learn to trade the non-farm payrolls

The non-farm payrolls report, the monthly US employment figures, is a significant indicator of the health of the US economy and one of the more eagerly-awaited key economic indicators in the financial markets.

It is intended to represent the total number of paid workers in the US, with the exception of farm, government and private-household employees, plus employees of non-profit organisations. The non-farm payrolls are typically released an hour before the official opening of the US stock market, (8.30am New York time) on the first Friday of each month, although the date will occasionally vary due to a public holiday. 

As there are 24-hour sessions for many markets these days, reactions tend to be extremely fast. See our what are non-farm payrolls article to get a better understanding and learn why the payrolls report is particularly important in forex trading. 

Trading strategies

With so many investors watching this data release, the payrolls can result in some sharp moves in the markets, both up and down, depending on how close the actual figure is to estimates made ahead of the announcement. This makes the payrolls a popular trading opportunity for many forex and indices traders. 

There are several techniques used when it comes to trading the non-farm payrolls, with popular strategies including fading the initial move and trading the trend.

Fading the initial move

One approach is to wait and see how the markets react when the news comes out. Since market moves can be volatile, there could often be an initial knee-jerk reaction when the data is first released. This can be combated by adopting what's known as 'fading' the initial move. 

For instance, let's assume the payrolls have exceeded expectations and are therefore expected to boost the value of the US dollar against a basket of other major currencies including the pound. Instead, the GBP/USD exchange rate rallies as soon as the announcement comes out, and the pound initially moves sharply higher against the dollar. 

Fading such a move involves waiting for this initial rally to run out of steam, which may only take a few minutes. Once that's happened, traders could then short-sell GBP/USD, placing a stop-loss order over the high for the rally. The assumption is that the trader is expecting a move back to where the market was immediately before the non-farm payrolls were released.

This also works if the market drops quite aggressively once the number has been released. It would be useful, however, to wait and see if the market pauses and then buy the position with a stop-loss order under the most recent low. Learn more about forex trading with us

Trading the trend

Another approach is where traders assume the initial market reaction was actually correct. If the market has moved sharply after the non-farm payrolls release then one assumption is that this is the start of a trend for the day ahead. 

Traders often tend to look at previous reference points to confirm a new trend. For example, has the move broken the previous day's high? If so, some would see this as a significant change in sentiment and expect the markets to move higher.

Another approach is to place a trade a few minutes before the figure is released. While this could result in a healthy profit, it is something of a 'coin-flip' on market direction as the markets can sometimes initially react contrary to general expectations. 

Risk management enables you to close the position if that view proves to be incorrect. 

Risk management

While volatility in the markets around the non-farm payrolls announcement is an opportunity for traders to try and profit, it can also result in a losing trade very quickly. It’s therefore very important to pay attention to your risk management approach.

If you want to place a trade directly ahead of a major release like this, it's important to place a stop-loss order in case the market does not move as you expect. 

The bottom line 

There really is no silver bullet when it comes to trading the non-farm payrolls. The volatility involved means it can deliver a large short-term profit, but hand-in-hand with that also goes the risk of greater short-term losses, so placing risk-management orders can be very useful in this instance. If you've never traded the non-farm payrolls, you could start by trading in small amounts, with the appropriate stop-losses in place to protect your position.

Disclaimer

CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.