Trading Non-Farm Payrolls

What is NFP?

The non-farm payroll (NFP) data is a key economic indicator that represents the number of jobs added to the US economy excluding farm employees, government employees, private household employees, and non-profit organisation employees. The US Bureau of Labor Statistics publishes it on the first Friday of each month at 8:30 a.m. Eastern time, along with the following important statistics;

• Private payrolls
• Unemployment rate
• Average workweek
• Average hourly earnings
• Participation rate
• Rate of participation

**********UPDATE************* The US job market continues to produce a steady stream of new positions, with employers competing to attract talent by offering competitive wages. Therefore, the next few jobs reports are unlikely to have a significant impact on the monetary policy unless they are significantly better or worse than expected over a sustained period.

As a major stimulus programme winds down, fiscal policy implications may remain. The Fed is paying closer attention to earnings and their impact on inflation and is committed to rapidly tightening monetary policy in order to prevent inflation from becoming entrenched in a wage-price spiral higher. *************

Why is the NFP Data Important?

Non-farm payroll figures give market participants a sense of how healthy the job market is a key metric used by the FED, and the results can cause a rapid repricing of economic expectations. A temporary withdrawal of liquidity can cause extreme market volatility in either direction, but after the first 5 minutes, the liquid tends to settle down.

How do I prepare to trade NFP?

  • Identify which data is most relevant to the market, this comes through external reading and understanding of the macroeconomic picture. Having a few buddies to discuss important economic events can really help and it is certainly something that is very normal on a trading floor.
  • Once you have identified the most poignant data draw up a reaction function table and highlight the extremes. You will want to trade data that will cause a clean move away from the current realm and that means trading only the extreme scenarios where this surprise new in information needs to be repriced.

Potential NFP Market Reaction An Example

 Earnings < 0.3% m/mEarnings 0.3-0.5% m/mEarnings > 0.6% m/m
< 300K JobsBearishNeutralSlightly bullish
300-600K JobsSlightly bearishNeutralSlightly bullish
> 600K JobsSlightly bearishNeutralBullish

Predefine your clip size and risk this decision has to be executed in real-time and comes with experience. The bigger the potential reward the bigger the stake is a good rule.

Pre NFP Checklist

  • 10 minutes prior to the release of NFP economic output data, mark the lows and highs of the most relevant local levels on your charts.
  • Where are we on the larger time frame, is there the potential for a larger move, and where are larger stops potentially placed? These are all questions you should be asking.
  • Identify where you want to engage, and where you want to be involved. Define your risk and targets in advance. Ideally, use OCO orders as it is often too difficult to physically trade.  The less decision making you make on the fly the better.
  • What is liquidity like, keep asking this question! Is the environment tradable?

Realtime Questioning

  • What were the number/numbers? How is the market reacting? Does this make sense relative to the release or an overreaction?
  • Is the market doing a good job, what is the health of the auction. These are the same questions I normally ask myself only speeded up 10 times.
  • Pullbacks to the SOC (Scene of the Crime) if you miss the first move, these trades can offer the best risk-reward.  Be careful to fade slower more deliberate price action back to the SOC. Understanding price action is important.  Footprint charts are your best friend unless you can read the ticker and that trumps all other tools.
  • Look for rejection reversal back through the SOC as the initial move is reversed. A countermove using data liquidity. Does this compliment an HTF trend?
  • Where are your HTF targets?

3 Trade Strategies I Utilise

These strategies are all dependent on the setup of the data and the product I will trade. each has its own risk-reward profile.

Pre-committed Entry

  • Place a sell order below the local range’s low and a buy order above the range’s high. This is done before the data.
  • Use an OCO against the other side of the local range and targets at a sensible level above or below.  I will always scale out partially at a predefined level to cover risk and try to leave a runner.
  • Wait for NFP’s initial reaction to trigger one of the orders.
  • After getting an open position size, cancel the pending order.
  • Analyse market reaction to the data potentially hold for a bigger move.
  • Use target price to determine the take profit.

RISK: HIGH if rules are not followed.

Trade The Data

  • As above but you enter your orders dependent on the data and your reaction function.

RISK: MEDIUM

Fading the Move

This assumes that the market has overreacted to the data.  Once again, key stops and levels need to be predetermined and cannot be determined in real-time.        

  • Identify your key HTF  areas where you want to engage.
  • Initiate trades in the opposite direction of the original release.  Again footprint and order flow are the best tools to use when the market approached your key area.
  • Follow your pre-trade plan. Maintain Discipline and know where you are wrong.

RISK HIGH if rules are not followed.

Conclusions

Trading NFP creates high volatility and opportunity where many of those new to trading fail to follow a simple structure in their interactions with the market. I have outlined some of my processes into and during NFP and although not a comprehensive list it offers some good guidelines. Once again this process is my own and you need to come up with your own but the key to success is being consistent and recognising loss is a normal part of day trading.

I hope you find this article interesting. If you would like to learn more on how to trade using a market profile, and footprint please subscribe to the newsletter and visit me on YouTube where I am trading live most days. Or Subscribe and I will send you my daily journal.

Or join me in a great trading community at ConvergentTrading.com

Trade Well and Prosper

BT

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