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Learn to trade non-farm payrolls

The non-farm payrolls report the monthly US employment figures, and it is a significant indicator of the health of the US economy and one of the more eagerly-awaited key economic indicators​ in the financial markets.

It is intended to represent the total number of paid workers in the US, with the exception of farm, government and private-household employees, plus employees of non-profit organisations. The non-farm payrolls are typically released an hour before the official opening of the US stock market, on the first Friday of each month, although the date will occasionally vary due to a public holiday.

As there are 24-hour sessions for many markets these days, reactions tend to be extremely fast. Read on to get a better understanding and learn why the non-farm payrolls report is particularly important for your trading strategy and how you can access it via our web-based software, Next Generation​​.

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What are 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.

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Non-farm payroll dates

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.

Non-farm payroll times in the UK

The non-farm payrolls are usually released at 1.30pm (UK time), or 8.30am (EST) on the first Friday of every month and offer trading insights into month-on-month and year-on-year data. Month-on-month shows last month’s number compared to the prior month, while year-on-year shows last month’s figure compared to the same month a year earlier.

After registering for an account with us, you can set notification alerts on our economic calendar, so you won't miss non-farm payroll dates again.

Non-farm payroll trading strategies

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.

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.

Fading the initial move

One approach is to wait and see how the markets react when the news comes out. Since market moves can be volatile, there could often be an initial knee-jerk reaction when the data is first released. This can be combated by adopting what's known as 'fading' the initial move.

For instance, let's assume the payrolls have exceeded expectations and are therefore expected to boost the value of the US dollar against a basket of other major currencies including the pound. Instead, the GBP/USD exchange rate rallies as soon as the announcement comes out, and the pound initially moves sharply higher against the dollar.

Fading such a move involves waiting for this initial rally to run out of steam, which may only take a few minutes. Once that's happened, traders could then short-sell GBP/USD, placing a stop-loss order over the high for the rally. The assumption is that the trader is expecting a move back to where the market was immediately before the non-farm payrolls were released.

This also works if the market drops quite aggressively once the number has been released. It would be useful, however, to wait and see if the market pauses and then buy the position with a stop-loss order under the most recent low. Learn more about forex trading​ with CMC Markets.

Trading the trend

Another approach is where traders assume the initial market reaction was actually correct. If the market has moved sharply after the non-farm payrolls release, then one assumption is that this is the start of a trend for the day ahead.

Traders often tend to look at previous reference points to confirm a new trend. For example, has the move broken the previous day's high? If so, some would see this as a significant change in market sentiment​ and expect the markets to move higher.

Another approach is to place a trade a few minutes before the figure is released. While this could result in a healthy profit, it is something of a 'coin-flip' on market direction as the markets can sometimes initially react contrary to general expectations. Risk management enables you to close the position if that view proves to be incorrect.

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How to trade non-farm payrolls

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).

Risk management

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.

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*308,644 active spread betting, CFD and stockbroking clients, CMC Markets plc annual report 2021. Active clients represent those individual clients who have traded with or held CFD or spread bet positions or who traded on the stockbroking platform on at least one occasion during the financial year.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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