Have you ever observed USD pairs starting to move dramatically? You can’t help but scratch your head and ask what the heck is going on with the market. As it happens, there are a few potential triggers for a shift in the market’s direction.
NFP is one such option. You’ve probably heard of it, right? Anyone who deals in foreign exchange (forex) has likely come across the acronym NFP. Welcome aboard if you haven’t already! In this post, we’ll discuss this concept as well as how to trade the NFP, provide an example of an NFP Forex strategy, and much more!
What is the Nfp Forex Strategy?
The NFP, or nonfarm payroll, report is a fundamental economic factor. Non-farm payroll data is typically issued on the first Friday of the month (occasionally the second Friday) at 8:30 a.m. EST. The NFP report reveals the state of employment in the United States, providing insight into the robustness of the economy. As a result of the report’s release, traders rush to adjust their holdings, and it’s not uncommon for the GBP/USD to swing by 75 to 100 pips in the minutes and hours that follow the release. At times of strong volatility and general market volatility, the report can trigger further price volatility of 200 pips or more.
Before the NFP report comes out, currency pairs that include the US dollar are usually very volatile, no matter what the result is. However, if the result is very different from what was expected, volatility is more likely to go up. While this greater degree of volatility can provide trading opportunities, it also brings with it a substantial rise in risk, making NFP trading a potentially risky endeavor. Thus, many traders avoid the markets on the day it is scheduled to be released. Those who do want to trade should do so only after carefully considering their risk tolerance and financial capacity.
Nfp Forex Strategy
All major currency pairings react differently to the NFP news, but the British pound/U.S. dollar (GBP/USD) is a popular choice among traders. Once the market has processed the report and made its initial move, traders will initiate a trade in the direction of the dominant momentum. This prevents getting in too early and minimizes the likelihood of being whipsawed out of the market before it has picked a direction.
In the first candle following the NFP report, nothing is done (8:30 to 8:45 a.m. in the case of the 15-minute chart). The candle created between 8:30 and 8:45 a.m. will be ranging. After this first candle, traders await the occurrence of an inside candle (it does not need to be the very next candle). What this means is that they are watching for the range of the most recent candle to fall totally inside the range of the candle before it.
Our entry and exit points for trades are the inner candle’s high and low, respectively. Buy if the price rises above the inner candle’s high. Sell if the price falls below the inner candle’s low. You may set a stop-loss of 30 pips on the trade you entered or based on your own money management strategy. The profit target is a time-based target. The majority of market action often happens within four hours of a report’s release. Therefore, traders exit their positions four hours after their initial entry. If you’re already in the trade and want to remain in it, you may use a trailing stop. This strategy can be used on 5-minute or 15-minute charts. The rules and examples that follow are meant to be applied to a 15-minute chart, although they are also applicable to a 5-minute chart. Even though signals can happen at different timeframes, they should always match up with each other.
Buy Signal
- Mark the highs of the previous four hours of trade on the charts fifteen minutes before NFP economic production data is released.
- You may place buy orders above the range’s high
- Put a safe stop-loss order on the low of the range.
- Take profit based on the 4-hour target price.
Sell Signal
- Mark the lows of the previous four hours of trade on the charts fifteen minutes before NFP economic production data is released.
- You may place sell orders below the range’s low
- Put a safe stop-loss order on the high of the range.
- Take profit based on the 4-hour target price.
Nfp Forex Strategy Pros & Cons
Pros
- NFP volatility increases profit possibilities and trading opportunities.
- It is an easy strategy for evaluating the present trend.
Cons
- The market may have moved sharply in one direction and hence may be starting to fade by the time a trader receives an inside candle signal.
- Even after waiting for a pattern to form, price might move rapidly during periods of extreme volatility.
Conclusion
The NFP forex strategy is done by waiting for a little bit of stability, called the “inner candle,” after the initial volatility of the news has died down and the market is trying to figure out its direction. Trading the NFP is not for everyone, and it may be advisable for more conservative traders to avoid the market on the first Friday of each month, when the report is released. Still, there are a lot of traders whose trading strategies depend on volatility and who do well when it is high. Regardless of the kind of trader you are, all trading is dangerous, and higher volatility amplifies this risk dramatically. This is why risk management in trading is so vital.
Another important thing to keep in mind when trading the news is that broker conditions can be unsuitable. This is because the increased volatility around news releases can cause higher spreads and slippage. For the best possible conditions if using a nfp strategy, I would be looking at an ECN broker such as IC Markets. This is because they have tight spreads, low commission fees and quick trade execution speeds.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
