This monthly economic indicator has all the beginners googly-eyed.
And for no good reason either.
In this article, we’re going to show you the true non-farm payroll and explain what is NFP in forex.
Buckle up, because at the end of this article we’re going to share with you why you MUST avoid this data when trading.
Check it out:
What is NFP for Forex?
Non-Farm Payrolls, or NFP for short, is a monthly number put out by the Bureau of Labour Statistics that measures what percentage change in employment there was since last month.
The data’s release happens every first Friday of every month at 8:30 am Eastern time and it influences the markets because it is seen as an indicator for the health of the US economy.
It also gives investors an idea of what the Fed will do with interest rates.
How to interpret the non-farm payroll data?
The non-farm payroll data is what traders use to determine the strength of a country’s employment situation.
They can be used in two ways:
- To help assess and forecast how economies are performing (e.g., if you want to know what percentage change there has been in jobs since last month).
- And as a predictor for what the future interest rates will be.
What does it mean if the non-farm payroll data is higher than what was expected?
If the non-farm payroll report exceeds what economists were predicting, then there are more jobs available and therefore an increased demand for goods and services as people have more money in their pockets to spend on these things.
It means that the economy is strong and will continue to grow.
What does it mean if the non-farm payroll data is lower than what was expected?
If a country’s non-farm payroll report falls below what economists were predicting, then there are fewer jobs available and therefore less demand for goods and services as people have less money in their pockets to spend on these things.
It means that the economy is not doing well and will likely continue to shrink.
This can lead investors to sell what they own because of fear for what may happen next, which in turn causes a decrease in share prices, or what we call a bear market crash.
Higher than expected = better for US economy = USD Strengthen
Lower than expected = worse for US economy = USD Weaken
How to Accurately Guess The NFP Before It’s Released.
This is the trick that everyone trader worth their weight uses.
It’s also really easy too.
All you have to do is this:
Track the weekly jobless claims data.
If it’s trending higher, expect a weaker NFP
If it’s trending lower, expect a stronger NFP
You can also match this up with the consensus for the NFP – if there is acceleration in the weekly jobless claims – this can produce a higher than expected result.
The reverse is true if weekly jobless claims are falling rapidly.
If the trend of the weekly jobs is slightly incremental but predictable almost – say within a few 1000s claims – then you can expect the NFP consensus to be accurate.
These figures are accessible to all, it’s how you interpret them.
This doesn’t mean you’ll be able to predict the NFP outcome precisely.
But you’ll be able to guess accurately on which side of the consensus you’d expect.
What Actually Causes The NFP Move.
One of the reasons why NFP data causes such a huge change in forex markets is because it’s what drives rates.
Traders watch what will happen with interest rates after the release and they do this by watching what happens to short-term Treasury securities, or T-bonds.
When interest rates are low, what this means is that people would be more likely to borrow from the bank or take out a mortgage.
The T-bonds go up in price with lower interest and there’s less demand for them so they become worthless.
And what does it mean when an asset becomes worthless?
Well, traders’ perception of what the economy looks like goes down and what they think will happen with interest rates also goes down.
But when non-farm payroll data fails to meet expectations, it can cause a rate hike – something nobody wants.
Remember when we were talking about the weekly jobless claims data?
Remember when we said any forex trader worth their weight tracks these figures too?
Well, that would be institutions and hedge funds would also be using the exact same technique mentioned early.
What you actually see when the data is released to the markets is this:
Institutions liquidating their large positions that they have been scaling into based on their own systematic framework and analysis.
These liquidating events take out a huge amount of stop losses and take profit orders at the same time.
Thus creating a large spike in prices across the exchange.
That’s all it is.
Why Beginners Are Attracted To The NFP
Like a moth to light, beginners are attracted to this data point more than anything else.
In the same analogy, these same beginners get fried by the light too.
“I want a quick and huge profit”
Quick, sharp, risky profits lead to quick, sharp, easy losses.
But it’s not your fault.
Brokers rely on pushing this message to you, highlighting the significance of the NFP and how to trade it.
So why do brokers do this?
Simple, if you trade it – due to the large moves – spreads are widened during this time – therefore they will make more money.
Just to be clear – most reputable brokers will not profit from your losses, but the spread the market offers can easily take out your stop loss.
So even if you get the call right, up or down, you may not even be able to exit the trade.
You should avoid this time of trading, it’s not worth it.
Why You Should Avoid The NFP At All Costs
Three key reasons:
- It’s expensive to trade – they widen the stops to cash in on the volatility.
- You can enter a trade and your stop loss does not get filled out due to market volatility, therefore you open up your account to get destroyed.
- You become a liquidity provider for the institutions to get out of their trades.
- It’s a gamble – even if you do your research on jobless claims.
Best Resources For NFP Data Releases
Here are some of the best resources to capture the Non-farm payroll data in real-time:
Now you know what is nfp for forex trading.
See, it’s not as scary (or lucrative) as advertised, is it…
Hopefully, you’ll pay attention to our warnings and progress as a forex trader.
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