Learn to trade the non-farm payrolls

The non-farm payrolls report is the monthly US employment figures, is a hugely significant indicator of the health and wealth of the US economy and one of the more eagerly-awaited largest economic indicators in the financial markets.
The point of the report is to represent the total number of paid workers in the US, with excluding farming, private-household employees, government and employees of non-profit organizations. The non-farm payrolls are usually released an hour before the official opening of the US stock market, (8.30am New York time) on the first Friday of each month, although the date will sometimes vary due to a public holiday. As there are 24-hour sessions for many markets currently, reactions tend to be extremely fast.

Trading strategies

With a vast number of investors watching this crucial data release, the payrolls can result in some very sharp moves in the markets, both up and down, depending on how close the actual figure is to estimates and judgements made ahead of the announcement. This makes payroll trading a very popular opportunity for many forex and indices traders.
There are several interesting techniques used when it comes to trading the non-farm payrolls, with some popular strategies including fading the ‘initial move’ and trading the ‘trend’.

Fading the initial move

One way of assessing the payroll is to wait and see how the markets react when the news is released. Since market moves can be very volatile, there could often be an initial spike reaction when the data is first published. This can be combated by using what’s known as ‘fading’ the initial move.
For example, let’s assume the payrolls have exceeded all our expectations and are indeed expected to boost the value of the US dollar against a handful 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 vividly higher against the dollar.
Fading this kind of move involves waiting for this initial rally to run out of steam, which may only take just 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 will also work if the market significantly drops once the number has been published. It would be useful, however, to wait and see if the market pauses and then buy in on the position with a stop-loss order under the most recent low.

Trading the trend

Another approach is where traders correctly assume the initial market reaction was actually right. If the market has moved sharply after the non-farm payrolls release then one assumption is that this is the start of an interesting trend for the day ahead.
To confirm a new trend, traders often tend to look at previous reference points. For example, has the move broken the previous day’s high? If so, some would see this as a prominent change in sentiment and expect the markets to move even higher.
Another approach is to place a trade just a few minutes before the payroll 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 the general expectations. Risk management enables you to close the position if that view proves to be in fact incorrect.

Risk management

It’s very important to pay attention to your 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 the loss of a trade very quickly.
It is important to place a stop-loss order in case the market does not move as you expect, if you want to place a trade directly ahead of a major release.

The bottom line

When it comes to trading the non-farm payrolls, the volatility involved means it can deliver a nice short-term profit, but also take into account the risk of greater short-term losses, so placing ‘Risk-management’ orders can be very useful in this particular instance. If you’ve never before traded the non-farm payrolls, you could start by trading in small values, with the appropriate stop-losses in place to protect your position.