NFP – short for Nonfarm Payrolls – is one of the most important acronyms any forex trader should think about. Here’s why it can be so important to your fortunes.
Among the many news announcements forex traders will be looking for are the non-farm payroll figures. These can have a significant impact on the market, but it’s important to understand what they are, what their effect can be and how you can use them to boost your trading performance.
What is NFP?
The non-farm payroll is an important metric which comes out of the US economy. These monthly announcements represent the number of jobs added excluding farm workers, employees of non-profits, private households and the government.
They are normally released on the first Friday of every month by the Bureau of Labor Statistics and are among the most eagerly anticipated announcements among traders. Depending on what they say, they can inject a whole lot of volatility into the market.
This is seen as an important indicator about the overall state of the economy and has a major impact on policy making for the Federal Reserve (FED). If these figures are heading downwards, it suggests the economy falling below its potential and will encourage the FED to try to stimulate growth.
This normally involves cutting the interest rate to encourage spending and push inflation up. This will generally cause a currency to depreciate.
Much of the movements depend on expectation versus reality. For example, if NFP shows worse job figures than expected, it can spark a period of considerable market turmoil. This can increase spreads and increases the likelihood of a dreaded margin call, which happens when a trader runs out of available money to make a trade and gets closed out of their trades.
Will You Be Affected?
NFP focuses on the US market, so it will affect currency pars which include the US Dollar, such as EUR/USD, JPY/USD or GBP/USD. For example, poorer than expected NFP data should cause the Euro to appreciate against the dollar. The news would create an expectation that the FED will cut interest rates to attempt to stimulate growth.
However, these moves will be based on expectation and may not transfer to reality. For example, if the market expects the FED to cut interest rates, but they decide to hold, it could see the dollar appreciate.
Even if results come in as expected, it can cause volatility because so many traders are watching it. A par performance would mean traders might look at other underlying metrics, such as employment figures or manufacturing payrolls to take a position. Based on their strategies, different investors may take different approaches which can increase volatility and cause spreads to rise.
In volatile market conditions, everyone can be affected, even if you’re trading pairs which do not involve the dollar. Volatility can grow, spreads can rise and you may still find yourself being stopped out of your position.
How to Trade It
Trading on news releases can be very profitable if you get it right, but it can be quite dangerous. For this reason, it can be better to adopt a pull back investment strategy in which you wait for wild swings to subside before you capitalize on the real market movement. This happens after investors have either been wiped out or taken their profits/losses.
This is a safer, and perhaps more reliable, way of trading rather than attempting to surf the rough seas caused by irrational and varied reactions within the first few minutes of the release. This approach waits for signals which suggest the market has decided which way it is really going to go.
The volatility caused by the NFP announcement can create an opportunity for active traders who make decisions based on market news in real time. However, it’s not for the faint-hearted. If you get it wrong, you can be in line for some serious losses. This is why it can be better to take your time and wait until you’re more confident about where the market is actually going.
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