Curious about how to trade NFP effectively? In this article, trading expert Michael Stark shares his NFP trading strategy, key mistakes to avoid, and real setups.
Trading major news is extremely popular among CFD traders, and there’s a particularly wide variety of opinions on how to trade the NFP (Nonfarm payroll) specifically. Most retail traders, regardless of their usual strategy or volume, have traded the NFP at least once. This is a period of high volatility in the markets, which means that while potential profits can be realized using the same volume, losses can also be significantly larger compared to less important news releases. Understanding the NFP report is crucial for navigating the forex market and timing trades based on market sentiment and expected NFP results.
In this article, I will discuss some ideas on how to trade the NFP, and specifically some of the more common mistakes made by traders who focus on the NFP, and how you can try to avoid them. I definitely don’t think there’s a single “best” approach to trading the NFP; these are just some ideas and tips that have worked for me in the past. In the latest episode of Exness Trading Talks, we look at what the NFP really tells you. Here, the focus is more on practical approaches to actually trading it, but if you haven’t seen the podcast yet, here’s the summary and link to watch it now.
Key takeaways
- The NFP is a monthly job figures report released by the US Bureau of Labor Statistics (BLS). It carries significant weight, given employment’s impact on spending and its direct and indirect influence on monetary policy.
- The report is broken down into total nonfarm, unemployment, average earnings, and various other measures, including participation rate.
- The NFP proper (total nonfarm figures) and unemployment are usually the most important parts of the report, but average earnings can be more significant if there’s an active narrative around inflation.
- It’s important for NFP traders to know the expectations and react quickly to the actual release and how much it diverges from the consensus.
- Related data released before each NFP can help you gauge expectations better. These include the ADP’s job data and initial jobless claims.
- The nonfarm payroll (NFP) data is one of the most important labor statistics used by market analysts to assess the health of the US economy and anticipate interest rate expectations.
The NFP beyond the headline
The NFP is the headline figure for the American job report and is often used as shorthand for the report as a whole. Many participants in financial markets consider it to be the world’s most important regular economic data release. The American jobs report includes the NFP, total new nonfarm payrolls, plus the rate of unemployment, average hourly earnings, and a number of other, usually less important statistics as a whole. This key economic indicator often shapes market movements across the forex, equity, and bond markets based on the initial reaction to the nonfarm payroll report.
Total nonfarm and unemployment don’t need much introduction when considering how to trade the NFP. Better figures–higher for total nonfarm and lower for unemployment–are positive for the dollar and negative for gold in general. However, in some situations, it can be important to monitor earnings as well. In such a scenario, wage growth data—especially average hourly earnings—can heavily influence market direction and bond yields.
Why average earnings matter for NFP trading
In the first several years after COVID, the annual growth in average hourly earnings was much higher than it had been in the decade before. This placed upward pressure on inflation as an indirect result, but also brought more focus on the figure since it seemed to compound the general impression from total nonfarm and unemployment reports that the job market was particularly strong overall.
When the NFP is released, traders usually focus on the total nonfarm and unemployment rates. The NFP’s unique position in financial markets boils down to two basic factors: volatility and the unpredictability of the results. I’ll look at these two key factors in turn and consider some tips for reducing their potential negative impact if you choose to trade the NFP.
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Volatility: The other “double-edged sword”
One of the most unpredictable aspects of the NFP release is how financial markets will react in the minutes following the NFP data release. Volatility is at least somewhat higher than average for every major CFD apart from crude oil in the first few hours after an NFP release. However, it’s impossible to predict how much higher it will be with reasonable accuracy.
How to use ATR for NFP trading strategy
I believe that one of the most reliable ways to measure intraday volatility for CFDs is by using the Average True Range (ATR indicator). ATR first calculates individual true ranges, taking the largest of three simple equations for each range.
- Current high minus the previous close.
- Current low minus the previous close.
- Current high minus the current low
Stop placement tips for high volatility
Usually, these true ranges cover the last 14 periods, but you can use a slower or faster setting if you like. The indicator then averages the readings over the number of periods and displays the result of the whole calculation for each period in a continuous line.
There’s no reason for you to do this yourself because the platform does it for you. Here’s an example of gold’s chart following November 2022’s NFP:
The ATR is the bottom indicator represented by the light blue line. It spikes as the NFP is released at 12.30 GMT, and then continues to rise in the aftermath, peaking around 4.75 USD before declining again in the evening. This is a pretty typical structure for ATR around an NFP, but you can never be sure how high ATR will go.
Technical analysis tools like ATR can help forex traders develop a more robust NFP trading strategy based on recent volatility. Trading on a low timeframe usually needs to align with volatility, as shown by ATR. If M15’s ATR for gold was around 1.90 USD, for example, which is a pretty typical value except around significant news, I would never normally set a stop less than 2 USD from the price of entry. Doing so would practically guarantee my stop triggering in the next period or two.
However, like any other technical indicator, ATR lags the price. When it comes to the NFP, you don’t know what the effective ATR will be for the next several periods because the price changes so quickly. In my experience, it can be better to set a loss beyond the latest high or low before the release.
That might mean that my stop is further away than usual. This isn’t necessarily a problem if I trade less, though. If I stick to my rules on risk per trade, normally no more than 2% of the account, I can still trade the NFP without extremely high risk exposure.
I also consider historical performance when setting realistic expectations. Given that it is practically impossible for gold to move more than 5% in a day, it is usually not a good idea to opt for a very high risk-to-reward ratio, irrespective of the short-term strategy I use.
Leverage is the primary "double-edged sword," also known as the CFD trader's smoke grenade, because it amplifies gains and losses. Volatility works similarly, but obviously, you can't control how volatile the market is, regardless of the way you choose to trade the NFP. I mitigate the adverse effects of high volatility by trading less in most situations unless the appropriate place for a stop indicates otherwise.
The limits of leverage and risk management
Statistically speaking, a trader is more likely to lose money around the NFP than around less important releases or times when there’s no significant news. That’s why Exness limits leverage to 1:200 for gold and forex majors during the jobs report. This reduces Exness’ risk as a broker, but historically, it has had a bigger impact in limiting losses for traders. As an ethical market maker, Exness wants traders to continue to trade with us and hopefully make consistent profits. Lower leverage around major news contributes to these goals. Managing risk is critical when trading currencies around the NFP, especially when using leverage for volatile currency pairs like EURUSD.
My strategic setups and approach to risk around the NFP
My personal NFP trading setup
My typical “plan of attack” as a news scalper before the NFP release is to wait for the actual results to come out, then trade in the direction of the knee-jerk reaction as quickly as reasonably possible. This setup helps me identify trading opportunities following the employment situation report while minimizing the chance of risking real capital unnecessarily. Usually, I set my stop somewhere above or below the 50 SMA on M15, depending on whether I’m buying or selling. My target is at least 1.5 times the distance of the stop from the price of entry, usually more. Most of the time, I’d also use a trailing stop aligned to triple or quadruple the volatility on M5, but I realise that many traders don’t want to do that for various reasons; a trailing stop isn’t critically important.
This approach often works for me, but I think that’s partially because I reduce the psychological risk by keeping volumes low. The main problem with this general strategy is that financial markets often do not behave in the way that anyone might expect.
Example trade: December 2022’s mixed report
In this example of gold’s M15 around December 2022’s NFP release, the initial kneejerk was retraced very quickly. This can happen for various reasons: no clear impact on monetary policy, general sentiment in markets, diverging signals from different specific figures in the job report, or simply excessive initial enthusiasm.
Using the example above, one of the primary reasons for the quick retracement appeared to have been the lack of any overall “theme” in the NFP data. The total nonfarm amount was 263,000, better than expected (positive for the dollar), although lower than the previous figure (negative), which was revised upward to 284,000 (positive). The 3.7% unemployment rate was in line with the consensus (neutral).
However, the key surprise from December 2022’s NFP was that average hourly earnings were much higher than expected. The monthly growth rate of 0.6% was double the consensus, and the annual change of 5.1% was half a percent more than the consensus. Given how much was made in 2022 off pay hikes contributing to inflation, many participants in the gold market initially panicked and assumed that the Fed would need to double down again on tightening.
However, that view seemed less likely once the dust began to settle. Unemployment wasn’t going up, but it also wasn’t continuing downward, and the NFP itself wasn’t notably divergent from the consensus. As more participants started to realise that this particular job report never necessarily meant anything for American monetary policy, the price of gold started to move back up as the dollar retreated. Such events highlight the need for experienced traders to factor in labor market dynamics, job creation, and broader economic growth.
How risk appetite shapes your NFP trading strategy
How you trade the NFP in this situation depends on your risk appetite. I’m generally fairly tolerant of risk around the NFP because I keep my volume low; for me, the worst possible thing around the NFP is to see loads of huge numbers flying around. I followed my typical plan described above with a fairly tight trailing stop, then switched direction after the first significant up candle on M15, again using a trailing stop.
A trader with average risk tolerance and a quick eye might notice discrepancies in the job report figures, and wait until the reaction beyond the first hour becomes clearer, avoiding entries if the larger direction seems uncertain. Finally, a conservative trader–inasmuch as that’s a valid description for any scalper– might not trade that month’s report at all if they see a mixed data release with a significant surprise.
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Final thoughts on how to trade the NFP: A variety of approaches
Trading the NFP is a varied experience across months as the overall context and sentiment of markets can drive quite different reactions to similar figures from month to month. It can be a thrill to learn how to trade the NFP during high volatility, but excitement often makes for poor decisions, so trading the NFP doesn’t work for everybody.
If you want to learn how to trade the NFP this month, some useful overall tips apart from the specific ones above are to be realistic, avoid greed, and focus equally on potential losses and potential profits. While time is a critical factor, I don’t like to be too hasty about deciding what to do next. Above all, I remember that markets and the job report will still be there next month: even no position is a position.
Whether you're using a demo trading account or trading live, understanding the NFP data and broader jobs data helps in making informed investment decisions. And, if you’re developing your own NFP trading strategy or just starting to learn how to trade the NFP, remember that consistency and risk control matter most.
Frequently asked questions about how to trade NFP
Why is the NFP report so important in financial markets?
The nonfarm payroll (NFP) report is a key economic indicator that often drives sharp market movements across the forex market, equity markets, and bond market. It reflects monthly changes in the job market, excluding farm workers, government employees, private households, and non-profit organisations. Since investors anticipate these figures as a gauge of economic growth and market sentiment, the initial reaction to the NFP release can significantly impact the US dollar, currency pairs, and commodity prices.
What’s the best way to develop an NFP trading strategy?
A good NFP trading strategy requires a clear trading plan, a solid understanding of NFP data, and effective risk management. Many experienced traders use tools like technical analysis and monitor average hourly earnings, unemployment rate, and market expectations before the data release. Trading around NFP is often based on how market analysts expect the Federal Reserve to respond to the figures, which is why it's essential to keep an eye on the economic calendar and broader employment situation report.
How does the NFP release affect the forex market and currency markets?
The NFP release is one of the most-watched events in the forex market, as it typically leads to increased volatility in currency markets, especially major pairs like EURUSD. Traders closely follow nonfarm payroll data, wage growth, and labor statistics to anticipate market direction and possible interest rate expectations. Forex traders often trade around the expected NFP figures, taking positions based on projected future price movements of currency pairs.
Can I practice trading NFP without risking real capital?
Yes, using a demo trading account is one of the safest ways to test your NFP trading strategy and build confidence before risking real capital. This allows traders to observe market reaction to the NFP report, experiment with trading opportunities, and refine their risk management skills. Practicing in a simulated environment helps make more informed investment decisions when you eventually trade live in major markets like forex, bonds, or commodities.
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