The nonfarm payrolls (NFP), released on the first Friday of each month by the US Bureau of Labor Statistics, is a critical economic report. The NFP report usually triggers significant price movements among currency pairs that include the US dollar. Most experienced traders know that it is difficult to trade nonfarm payrolls given that in many cases the published figure misses estimates by significant margins.
However, forex traders who have the right trading strategies in place often look to trade during the higher volatility in currency pairs such as the EURUSD. Trading in this volatile environment can increase the change of both significant gains and significant losses.
In order to day trade the NFP experts suggest that you make sure to close all your trades at least ten minutes before the NFP report is released. This is so that you do not get adversely affected by the extreme volatility during the announcement. Once the report is announced, it is advised that you wait for the initial move to run its course in the first few minutes before deciding the direction of the trade you want to make.
Experts suggest that you restrict your NFP trading strategy to EURUSD, given that it is the most liquid and most traded currency pair globally. This means that volatility should generally be less than that of other USD-based pairs.
EURUSD will typically move by up to 30 pips in the first few minutes following the NFP report. Experts recommend you not try to trade on this move, but rather use it to set the parameters for your first trade.
One of the most common chart patterns associated with the non-farm payrolls is the V-shaped reversal where the EURUSD currency pair spikes before quickly changing direction. This move usually occurs between 10 minutes and two hours after the NFP report is released, which means that this pattern is most easily identified on the 5 minute chart.
Experts suggest that the best way to trade the V-shaped reversal is to wait for the initial move after the NFP report is released to finish. This can be easily identified by the formation of a reversal candlestick. Once the reversal candlestick appears, you can initiate a trade in the opposite direction to the pair’s initial move.
Bear in mind that you will most likely not capture the profits from the entire move, but with proper timing, you can capture a significant percentage of the reversal. Note also that there is no guarantee that this reversal will take place, so make sure you watch the chart closely before making a move.
Given the high volatility associated with the NFP, do not enter into trades with the initial move, but wait for a slight pullback covering at least five one-minute bars. After the pullback is established, draw a trendline. This should cover either the lows of the five bars, if the initial move was in a downwards direction, or the highs of the pullback, if the initial move was in an upwards direction. You should only enter into a trade if the price breaks above or below the trendline you just drew. It’s essential also to ensure that you set a tight stop loss in order to manage risk.
There is another way to approach the NFP announcement using the one-minute chart. If the price of the currency pair undergoes a pullback exceeding 50% of the initial move, it is suggested that you let the price consolidate for two bars, and then draw a trendline of the lows and highs in the consolidative range.
The trade you enter largely depends on the direction of the initial move. If the initial move was up, you could enter into a long trade once the price breaks above the high of the consolidation phase. If the initial move was down, enter into a short trade once the price breaks below the lows of the consolidation phase.
You should place your stop loss at least one pip below the low of the consolidation phase, in case of a long trade, or one pip above the high of the consolidation phase, in case of a short trade.
The simplest way to set a profit target is to measure half the distance covered by the EURUSD currency pair in the initial move, then set it as your profit target. For example, if the pair’s initial move covered 50 points, you should place your profit target at 25 points above your entry point in whichever direction you choose.
Understanding how to trade the nonfarm payrolls is a key skill for day traders looking to take their trading to the next level. It is important to note that the increased volatility created by the NFP means that trading during this period is only for experienced traders comfortable with risk management strategies. Practising with a Demo account is a great way to learn how the market reacts to the announcement, without any risk.
Want to start trading? Open an account now — or try trading with a Demo account. The choice is yours.