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NFP Trading Strategies: Trading the Number

Having established an edge with an extremely fast data feed and superior information regarding the NFP, we want to use both of these tools to our advantage in trading the NFP.

The basic premise is that if the number is good, we want to buy USDxxx or sell xxxUSD, and we can use any extra information we have to further our chances.

  1. Number in line with consensus view: Buy USD - move may not be huge.
  2. Number beats consensus view: Buy USD - if number beats consensus by a strong margin, expect a much larger move.

 

This may seem incredibly simple, and that’s because it is. The incredible amount of market focus on the NFP release has created a situation where the sheer volume traded on this basis makes the outcome that simple.

Let’s take a look at some examples to illustrate this.

June NFP Release

 

For the image please refer to the video at 2:11

Actual = 280k Reuters Poll = 225k Prior = 223k

140 min – 350 max

 

Here, we can see that the number strongly beats market expectations and was in the very top of the forecast range, causing EURUSD to dump over 100 pips in a minute.

 

April NFP Release

 

For the image please refer to the video at 5:40

Actual = 126k Reuters Poll = 244k Prior = 264k

195 min – 290 max

 

Here, we can see that the number wildly missed the market’s expectations, missing the Reuters Poll number but also falling far below even the lowest forecasted number of 195. Again, we saw USD plummet by over 100 pips against JPY.

It should be quite obvious by now that there is huge potential here in trading the number. All we need now are some basic rules to follow, so read on…

 

Strategy Rules for: Trading the Number

  1. Enter trade as soon as number hits.
  2. Stop should be 30 pips.
  3. As price spikes 30 pips in favour, move stop to entry.
  4. At the close of the 1 min bar, exit trade.

The objective here is to make a minimum of 1x risk but usually around 2-3, depending on your entry.

You could alternatively close half your position at the close of the 1 min bar and leave half to ride, playing for more. There will be times when this works out and you catch some good follow through – and there will be times when this doesn’t work out and the spike simply reverses. So for a consistently profitable strategy, banking that first 1 min bar is the preferred option.

The key thing here is you have to be decisive and take action – this is no time to deliberate and second-guess yourself.

You are trading an extremely important news release and looking to make extremely quick profits, so you need to be fast. As soon as the number prints on your screen or hits your wire, you need to execute your trade. There really is no time for delay.

 

Important Points

Now, as with all strategies, there are instances when you will lose and of course, this is part of trading: you have to accept that you won’t win all of the time. 

The NFP is a crucial report because traders use it to gauge the health of the economy and to anticipate the actions of the Federal Reserve Bank of America and so at times, depending on the economic conditions present, the number can take on slightly different meanings.

We aren’t going to give you an economics lesson because honestly, the various factors affecting the reaction to the NFP can be pretty confusing even for industry experts. But we will give you some examples, just so you aren’t totally dumbfounded by an unexpected move.

The February NFP release saw a 201 release vs. a Reuters Poll number of 234 and a prior release of 329.

So in this case, there was a clear miss of consensus and a vast decline from the previous number – so USD goes down, right?

Actually no, we actually saw USD pop higher. The reason for this was that it was the fifth consecutive print over 200k. At the start of this year, there was a lot of anticipation in the markets regarding the possibility of the Fed lifting rates in the summer and the NFP reports were used as a key indicator of whether or not America was on course for this – so although the print was a miss, it was still deemed a strong enough figure to keep the Fed on course to raise rates sooner rather than later. 

Another important piece of the puzzle is the fact that although we are focusing exclusively on trading the NFP here, the US Unemployment Rate data is released at the same time and is another hugely important data release, so that figure can impact how USD trades post NFP release.

So, having determined that a weak number won’t always mean USD goes down, what does that mean for our trading strategy? Simply, it means that – as with all strategies – there will be losses. There are no 100% win rate strategies. The key thing to remember is that when trading the NFP, the normal focal points still apply: consistency and risk management.