NFP Trading Strategy: Non-farm wage (NFP) data is one of the most important factors influencing the foreign exchange market and is probably the most widely used foreign exchange news with central bank events or interest rate decisions. Their influence seems to be disappearing in recent months.
On the first Friday of each month, the Bureau of Labor Statistics publishes data on US jobs and other labor market data. Data includes all employees except government officials, private households, non-profit organizations, and agriculture.
This is an important indicator of how good the U.S. economy is and investors are following this report closely. Major changes in initiatives and published figures can lead to significant price fluctuations. This article will show you why understanding the meaning of this statement is so important, how to interpret the numbers, and how to trade NFPs in general. The basic NFP Trading Strategy.
NFP and economics
The NFP consists of three sections and a news bulletin every day.
1) NFP number: Number of new jobs created or lost
2) Unemployment: Total unemployment.
3) Hourly wage: The average amount of income a worker earns.
The NFP provides information on the U.S. labor market, economic situation, and future. If the economy doesn’t work well, companies may not hire a lot of new workers and may even fire some of them. As a result, these people lose their income, reduce their gross income and consumption expenditures, and do not spend money on further slowing the economy.
On the other hand, when the economy is going well, businesses can now hire new employees with more money and use the extra income to buy things and activate the economy, which further increases the need for businesses to hire more. Hourly wages are the final part of the puzzle because it shows the purchasing power of these jobs.
NFP and US dollar data
The positive outcome of the NFP is good for the economy, so investors will buy US dollars in anticipation of future economic strength. Worse than expected, the NFP often causes the US dollar to fall as investors sell the US dollar.
This is a very simple picture. Now we move on to the more practical part. Sometimes you also see side effects that seem pointless at first. This is especially the case when publicly available information scares traders. The old adage “You don’t buy news, but how people interpret the news” applies very much to NFP trading funds.
Volatility and trading before the NFP
The NFP is a carefully watched news report and you can almost always see volatility run out when investors await bailouts. Therefore, prices often move sideways on the Friday before the NFP without any sense of direction.
As a long-term swing trader, I’m often out of the market at the beginning of Friday’s trading because I’m often overwhelmed by drastic volatility increases and it’s very difficult to find a profitable set.
How to deal with NFPs and understand job data
While the NFP is actually released, it gets unstable and very busy (a lot!). In general, each NFP edition has two price responses.
1) Immediately the volatility increases.
2) As more and more traders use the numbers and the price starts moving in the right direction, the price reverses.
Best Tips for NFP Trading Strategy:
It does not change the actual NFP number. It changes people’s expectations and reactions to this number. NFP numbers are the 3 most reported (at least for initial responses) and consist of 3 digits. Previous NFP numbers for the previous month, forecasts, and actual figures from experts. Now, three things can happen and often decide the investor solution.
1) Actual trading volume is higher than expected. There is a possibility that the previous dollar will rise.
2) Actual trading volume is lower than expected. There is a possibility that the previous dollar will fall.
3) Actual figures are higher and lower than predicted (or vice versa). There is no direction and more volatility when investors are confused.
The NFP was much worse than expected and is the report most people see in general. This led to a fall in the dollar and an increase in EUR/USD. Investors had a positive impact on the dollar, with increased profits and (positive) unemployment rates falling, while EUR/USD fell. A strong dollar drives EUR/USD down, and a weak dollar creates a EUR/USD rally because the US dollar is the second currency of this pair.
When investors are confused
The April data was very interesting because the NFP data was mixed and because investors don’t know how to deal with it, it usually leads to uninformed volatility.
The screenshot below shows this example.
The NFP was better than expected but worse than a month ago. The first EUR/USD fell back on the strong US dollar when the figures met expectations and then stopped again when investors realized the report wasn’t very positive.
The Non-Farm payrolls (NFP) measures the number of farm unrelated jobs found in the United States in the previous month. It is usually posted on the first Friday of the new month and also includes unemployment, average hourly income, and participation. While all this information can have an impact, the NFP is a market-leading propagator and the most widely viewed economic event published monthly.
Not all financial news is the same. Some events trigger a lot of hysterical reactions and reflexes, while others are less noticeable. The Ubiquitous U.S. Nonfarm Payroll (NFP) report is the first case. The NFP report has received a lot of attention, and finance experts and analysts are trying to predict the impact on a variety of financial products.
The widespread response is partly due to FOMC’s double orders for maximum employment and fixed prices. “Maximum employment” in this order means that the Fed is trying to help the NFP determine future interest rates, which will have a major impact on economic health. When labor growth is high, the Fed generally tends to raise interest rates when inflation is controlled, and vice versa when labor growth is weak. However, it is entirely due to expectations that determine whether the NFP is weak or strong.
Consensus expectations for the NFP play a huge role in the way marketers react to data, and the average expectations for a group of expert analysts are clear. For example, if the consensus expectation is 200,000 and the amount is £205, then the market reaction is not too strong because the actual situation and the market expectation are very close. The greater the difference between the expected consensus and actual data, the stronger the market response.
Two ways to trade NFP (NFP Trading Strategy)
If you enter a trade before the pattern is revealed, use your deductive thinking skills to predict the direction the market will go before it actually happens. Risk management is essential if you want to use this kind of strategy because unexpected patterns can theoretically create market gaps that can omit any risk reduction stops you specify. Therefore, it is advisable to equip you with all the tools of your choice to trade with a greater number of movements and vibrations to give you a better chance. Most central banks around the world want inflation to increase by about 2-3% annually.
Post-News Release trading is a bit more cautious, but it also carries its own risk. The initial harsh reaction to NFP headlines isn’t always the “endpoint” of today’s market movement. It’s well documented that marketers can simulate an NFP post-document as the wave goes in one direction and then turn around after a few minutes or hours.
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