CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.09% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

The vast majority of retail investor accounts lose money when trading CFDs.
76.09% of retail investor accounts lose money when trading CFDs with this provider.

Understanding and trading: Non-Farm Payrolls (NFP) in Forex

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Author: Leon Marshall
NFP stands for Non-Farm Payroll – the report and indicator that gives us insight into the employment situation in the US – one of the leading economic powers in the world.

The United States of America has several key economic indicators that are relevant in other countries as well. Amongst them is the non-farm payroll (NFP), or the NFP report. It provides a national view over the jobs created in the previous month. Economic growth is indicated by the levels of activity and health in the American economy. Every job counts towards the NFP except for those in the private, agricultural and public service sectors and volunteer-related jobs.

Forex traders take into account the NFP because of the strong correlation between employment rates in America and household consumption expenditure.

More jobs usually mean larger consumption, which means a higher GDP and a better economic outlook. The USD is the most common currency in forex for a reason – its home country has economic relationships with many nations. The NFP is a good indicator of the current state of the economy. As such, it has influence over other markets scattered across the world and gives traders numerous opportunities to speculate on movements in the market.

Understanding the NFP report

You can find the NFP report on the first Friday of each month at 1:30 PM GMT. After collecting forecasts among banks, economists, and private investors, the report is compiled and published. Other macroeconomic indicators function the same way in this regard, and for the NFP, the average and median are taken into account. Average means the average of all values after being added, then divided by the number of observations made. These observations are made by one of the forecast sources listed above. As for the median, this is the value walking the middle path where half the observations are smaller and the other half – larger.

When forecasts are on point, this allows the data to serve as a tool that prevents the market from making significant movements. More regularly we can see that forecasts are off the target and values deviate greatly. To traders, this is good news, because they can make use of the situation and react accordingly. One of the ways to do that is by confirming whether the NFP report is lower, higher, or in agreement with the forecasts. Higher values bump up the US economy and dollar. Lower values, on the other hand, tend to affect both the economy and currency negatively because of the economic downtrend expected to occur in the country’s development and employment rate.

What matters here is not the result itself, but the gap between the forecast and the result. It is the gap which puts forex traders on top of the potential price movement that may follow shortly after the publication of the report. To put it simply, if there is a gap between expectations and reality, there will be volatility.

Trading the NFP

It should be noted that due to the NFP being tightly linked to the USD, it can be a reason for changes in major currency pairs’ movement as well. Forex trading happens 24 hours a day so traders can trade the news at any time. Very often, traders would wait a bit to grasp how the numbers from the reports apply to the current state of the market. By doing so, they allow first-movers to pick the direction it takes. We can see how momentum affects the market and directs the rates of currency pairs even further, so going that route can prevent any incorrect speculations that could be headed in the wrong direction.

Such strategies rely on 5 min or 15 min charts that wait out the first bar and start making trading preparations to see how a most recent bar whose range is entirely inside the previous bar’s range – an initial/inside bar. When it is followed by a bar that closes above or below its high or low, it is time to head towards a breakout. The bar does not have to close in order to enter a trade. It can just pass the threshold for the trade to be potentially profitable.

Setting up a stop-loss at a certain pip level can serve as a guide to points of re-entry using the high and low once again. NFP traders can either be the first to enter or follow the chart for several hours before entering and then do the same until they decide to exit, as at some point, the market movement is not that easily noticeable. However, those who decide to go a bit more long-term, such as swing traders, need to be aware of fundamental forex terms, as well as the economic context in order to be able to follow the NFP report.