Forex Trading Example – How to trade the Non-Farm Payroll (NFP)

In this post I want to teach you a pretty good lesson in Forex trading. Using another trade example that was taken by one of my analysts, Nick, this post will show you how to trade the Non-Farm Payroll.

The golden rule being tuned into what the current market expectations are and how the news flows deviate away from these expectations.

A truly good trader knows exactly when this is occurring and how the markets will react. This gives them the chance to get in and take advantage of the opportunity that arises.

The key thing that drove Nicks decision to trade in the video was the fact that there was a build-up of reasons to expect a weaker number than previous. There was also the fact that current sentiment on the USD was positive because the Fed were in a rate hiking cycle.

The market reacts differently each time

There is no ‘one way’ to trade NFP. This is because any move is dependent on so many different factors. These factors include things like recent sentiment, market expectations, and current focus of the central bank. There is also the fact that the NFP report is generally analysed by including the outcome of the unemployment figure and the average hourly earnings reading.

To illustrate this we will use this post to look at a few examples of myself and our team have traded NFP based on all these factors and how these things change our approach each time.

Back in the summer of 2014 the Fed was right in the middle of ending its latest quantitative easing programme. The sentiment surrounding the NFP figures at that time was one of indifference.

Because the market had a bigger focus (The Feds ‘tapering’) and any individual figure was almost certainly not going to change this one way or the other, I remember distinctly holding USD based positions into the NFP figures.

Obviously I was not using leverage and I was very certain in my position but the fact remained that there was no consideration of NFP giving any real volatility at that time.

This goes against the roller coaster nature of NFP that most traders have in their minds. But the fact is that at that specific time NFP just wasn’t that important in the markets mind.

By the time that autumn 2014 rolled around, the situation with NFP figures was completely different. Suddenly there was a great focus on NFP and our trading team were now focusing specific attention in order to try and profit from it.

The Fed had now completed their tapering programme and the market was extremely bullish the USD.

Their sentiment now was that even if the odd figure came out worse than expected this would simply be a blip and this should be used as an opportunity to buy the USD at a cheaper price.

The average expectation was for a reading of 235k new jobs created. This was slightly lower than previous, however the market had decided that as long as all readings were above 200k in general then it supported the overall bullish view anyway.

In short, it was very difficult to sway the market away its overly optimistic view of the USD.

The figure came out worse than the 235k expectation while staying above the 200k level that the market liked. In this scenario we had worse than expected data but we were looking to buy the USD.

The simple reason was that we knew the market was still positive and nothing in the data at the time would change that view. This was an opportunity where we made solid profits directly trading NFP.

How you should approach NFP in future

The lesson in this post is that NFP can be very lucrative and even predictable but the key is not just trying to trade spikes or the pure data itself. The path to consistent gains lies in being tuned into what the markets are thinking and feeling at the time of each event.

These feelings change constantly but if you practice trading this event with that in mind you stand a very good chance of making profits and using NFP as a solid strategy to making a consistent income from home.

So at the next NFP try and break down your trade plan into three steps.

The first step should be to fully analyse the current market sentiment around the USD and also what the market is thinking the Fed’s next move on monetary policy will be.

Step two is checking the professional calendars (retail calendars are not as reliable) to see clearly what the markets expectations are for the upcoming figure and how this compares to the previous figure and the overall sentiment of the market.

And finally, the last step will practice your analysis skills and turn this information into a plan based on what you think will happen and how the market will react.

You can practice trading into the event or out of the event but the most important thing is that you are following these steps and learning from your experiences.

After each event check the reactions of economists and analysts to see how your thoughts match up and then add any lessons you have learned to your tool kit for the next event.

By approaching it in this way you will have a very strong probability of succeeding in making NFP a staple event for finding profitable trades and the best part is that you will improve your results over time.

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