Learn to trade non-farm payrolls

The US non-farm payrolls, or 'NFPs', is an official statistic released by the US Department of Labor, usually on the first Friday of every month.

The non-farm payrolls measure the number of people currently in employment in the US and are released along with the US unemployment rate. Both are important yardsticks used by traders and analysts alike to get an insight into the health of the US economy. Specifically, the non-farm payrolls measure the number of people in employment in all businesses across the country, excluding agricultural, local government, private household and not-for-profit sectors.

The non-farm payrolls are considered to be one of the most robust measures of the health of the US economy, as they can give an insight into future important data releases such as gross domestic product (GDP) figures and manufacturing data. This is because the higher the number of people in employment in a country, the better its economic output can be expected to be at the end of the quarter and vice versa.

For instance, consistently falling non-farm payroll figures could indicate weakness and the risk of a possible recession, whereas consistently robust data on a month-on-month basis could show a strengthening economy, possibly even indicating that the economy may be out of danger of falling into a recession.

Analysts release forecasts ahead of the release of the non-farm payrolls announcement, indicating a predicted number. When the payroll figures come in above expectations, or miss estimates on their release, it could take the markets by surprise and have a positive or negative impact on the US dollar and headline stock indices​ such as the Dow Jones Industrial Average. For instance, a better-than-expected NFP release could push the US dollar higher against other currencies, whereas lower-than-expected data may put pressure on the value of the US dollar against a basket of other currencies such as the euro, sterling or yen. It is for this reason that trading the non-farm payrolls can form an important aspect of your spread betting or CFD trading strategy.

With so many investors watching this data release, the payrolls can result in some sharp moves in the financial markets​, both up and down, depending on how close the actual figure is to estimates made ahead of the announcement. This makes the payrolls a popular trading opportunity for many forex and indices traders.

There are several techniques used when it comes to trading the non-farm payrolls, with popular strategies including fading the initial move and trading the trend.

Some traders take a position in the markets around the NFP release as the data has historically been known to cause sudden price movements in the market, giving rise to potential trading opportunities.

For example, let's say it is the first Friday of May and you expect the non-farm payrolls data released today to exceed analysts’ expectations. EUR/USD is currently trading at 1.13835/1.13842 (sell price/buy price). Forex is always traded in pairs​, with the first currency (also known as the base currency) quoted against the second or counter currency in the pair. This means that if you expect the first currency to rise against the second, you buy and if you expect that the first currency to fall against the second currency, you sell.

In the example above, you believe that, buoyed by positive payroll figures, the US dollar will rise against a basket of currencies, including the euro. Based on this assumption, you expect the euro will fall against the dollar and take a short spread betting position on EUR/USD, selling at 1.13835, at £2 per point. This means that for every point EUR moves lower against USD, you would make £2, whereas for every point EUR moves higher against USD, you would lose £2.

Let’s say you were right and the official NFP release data exceeds expectations, showing that the number of employed people in the US jumped by 5% month-on-month and 2.5% annually, a possible indication that the US economy has finally turned a corner.

The markets react positively to this news and within minutes of the NFP release, the US dollar has risen against the euro. When EUR/USD reaches 1.13813/1.13820, you decide to close your position, buying at 1.13820. Remember in this example, because EUR is the base currency and USD is the counter currency, the price of EUR/USD would have to fall in order for you to make a profit.

You sold at 1.13835 and bought at 1.13820, meaning that you made a profit of £30 (1.13835 - 1.13820 x £2).

Had the non-farm payrolls figures come in lower than expected, however, driving up the price of the euro against the dollar to, let's say 1.13850, you would have made a loss of £30 (1.13835 – 1.13850 x £2).

While volatility in the markets around the non-farm payrolls announcement is an opportunity for traders to try and profit, it can also result in a losing trade very quickly. It’s therefore very important to pay attention to your risk management​ approach.

Our intuitive and highly customisable Next Generation trading platform​ offers a range of trading tools and analyst reports, including access to an economic calendar, client sentiment tool and fundamental analysis reports, so you can devise a stronger and more effective trading strategy.

There really is no silver bullet when it comes to trading the non-farm payrolls. The volatility involved means it can deliver a large short-term profit, but hand-in-hand with that also goes the risk of greater short-term losses, so placing risk-management orders can be very useful in this instance. If you've never traded the non-farm payrolls, you could start by trading in small amounts, with the appropriate stop-losses in place to protect your position.