What is the Non-Farm Payrolls Report on Forex

2020-10-30

What is the Non-Farm Payrolls Report on ForexOleg Tkachenko

Non-Farm Payrolls is referred to as one of the most important reports that directly affect the US currency. It is one of the most significant events in the economic calendar and the basis of fundamental analysis strategies. Despite the simplicity of interpretation of the statistics, it is not so easy to make money on this report and experienced traders even argue that one should refrain from trying to open positions at the time of its release. In this review you will find out what Non-Farm Payrolls report is, who publishes it, how to analyze it, which strategies are based on it, what the challenges of earning on it are, and which pitfalls await a novice trader.

What is Non-Farm Payroll and how to make money on it?

Traders who prefer to use fundamental analysis really stick with the economic calendar. And no wonder! After all, the volatility after the release of statistical reports provides an opportunity to earn as much in a few hours as a trader usually earns in a week or even longer in a quiet market. It is quite logical that beginner traders are also attracted to seemingly easy money as for them making money on news looks relatively simple. And this is where they learn they are wrong the hard way. The Non-Farm Payrolls report is regarded as one of the strongest in terms of the impact on the dollar, and it is also one of the most ambiguous events during which one would be wise to refrain from trading. In this review you will learn:

what the Non-Farm Payrolls report is, when it is released, and where to find information about it;
how to analyze its values properly and how to earn on it;
what the challenges are, and why news trading is dangerous for beginners.

What is Non-Farm Payroll report (theory)

The Non-Farm report is one of the most anticipated reports on the US labor market, which affects the dollar particularly strongly. In terms of importance, this report is only second to the discount rate. This is a report that shows the change in the number of people employed over the last month in the non-agricultural sector. This includes statistics on government officials, private sector employees, and non-profit companies. The total number of people employed in this sector is about 80% (20% of those employed in agriculture are not taken into account, since this is seasonal work) of all those engaged in creating the US GDP. The general analysis is as follows:

if the actual figure is higher than the forecast, the mood of the traders is bullish (growth of the dollar against other currencies, as this is an indication of underestimated economic growth);
f the actual figure is lower than the forecast, the mood of the traders is bearish (depreciation of the dollar against other currencies, since this is indication of overestimated economic growth)

The screenshot shows the report statistics from the economic calendar. For example, let us look at the statistics as of September 9, 2018 (for August). When a change in the number of jobs by 191 thousand people was forecasted, the actual figure was 201 thousand people. Since it is higher than forecast, it is highlighted in green. This is a positive report perceived optimistically by investors (this is discussed in more detail below through an example in the next section). As practice shows, the market reacts significantly to the difference between the actual figure and the previous value for the period of more than 40K (201 - 147 = 54K).

Note that on September 9, 2018, the actual value matches the previous value as of October 5, 2018. This is the only example where these numbers match. Why? Statistics is not an exact science and the values are sometimes subject to revision. While the actual values of the change in the number of employees as of August 3, 2018 totaled 157K, after revision at the beginning of the reporting period (previous value as of September 9, 2018), this figure turned into 147K. Since the revision is lower than the actual value, the figure 147 is red.

This report is published every first Friday of the month at 3:30 pm (4:30 pm depending on the season) Moscow time. The source of information is a survey of more than 400 US companies, the calculations are done by the US Bureau of Labor Statistics (BLS), the author of the report is the US Department of Labor.

The report is analyzed in conjunction with the change in the level of the average hourly wage, which can ruin the statistical picture. Here mention the important accompanying reports:

Report by Automated Data Processing Inc., which is the largest operator serving payroll receipts. It comes out a day earlier than Non-Farm Payrolls and can be used to make a preliminary estimate of employment (knowing the average hourly wage). Despite the fact that it can only be tracked in news feeds (for example, Reuters), investment banks revise their Non-Farm Payrolls forecasts after its release.
Jobless Claims Report - weekly change in the number of applications for unemployment benefits published weekly on Thursdays. If their number decreases, there is a probability of the Non-Farm Payrolls value growth.

Traders can also follow data on PMI (business activity index), ISM (business optimism index) and consumer expectations index in the feeds of news agencies. It appears reasonable to analyze data on unemployment (employment) and the main sectors: production, construction, trade, transport, medicine and health care, as well as hotel and restaurant business.

The Fed is focused on labor market data: stable job growth leads to higher demand, and, consequently, higher prices. To contain inflation, the Fed raises the discount rate, which also affects Forex.

How to trade Non-Farm Payroll (practice)

With an effort. Due to the volatility and short-term impact of this report, some analytical resources do not even make a forecast for it. The following screenshot shows why:

The reaction on Non-Farm Payrolls is highlighted with a yellow circle. I think it is evident that there are much stronger fluctuations than the movement after the report, which is not always predictable.

Nevertheless, there are several trading strategies:

Buying or selling volatile currency pairs: the US dollar against the[ euro][1], the Canadian and New Zealand dollars, the British pound, or the Swiss franc. The position should be opened in the first seconds in the direction of the predicted actual value. If it is predicted that the actual value will be larger than the forecast, you open a long position, if smaller - a short one. Note that the previous value is irrelevant in this case. Example: if Previous value = 250, forecast = 180, Actual value = 220, then the position should be opened in the long direction, despite the fact that the Actual value is less than the previous value. Reason: the forecast has already been known for a long time and the market has already traded off its change in comparison with the previous value (previous period). If the forecast for the actual value does not match – you are out of luck.
Setting two pending orders before the report release simultaneously. The point of entry is determined individually. Both orders are insured by take profit and trailing stop. If the trend is in the same direction, you can get a good profit in a few minutes. But the risk of error in entry points remains. And if both orders are triggered due to volatility, the trader has a loss.

The main question of news trading is when to enter the market: before or after the release of the report? In the first case, there is the risk of being wrong (thus the trading on pending orders), in the second case there is the risk of being late.

Let us consider this example. On September 7, 2018, at 15.30, the Non- Farm report was published.

In July (report as of August 3, 2018), the number of new jobs created decreased by 157 thousand (later, after the statistics revision, the amount was changed to 147 thousand). However, analysts’ forecasts were in the direction of an increase to 191 thousand in August, but the statistics surpassed the results - 201 thousand new jobs created. This is more than optimistic, since the forecast for September is a decline to 185 thousand.

Investors immediately responded by betting on the dollar (red five- minute candlestick at 15.30). Those who missed this moment would have entered the market with far greater risks and lower profits. Please note that by the end of the session, those who bet on a short position in the euro began to close them. Logically, at the end of the working day the rate gradually went up. Here we should also metion Trump’s statement that the growth of the economy (4.2%) exceeded the unemployment rate (3.9%) for the first time in 12 years.

This figure shows that on the eve of the release of the report, the trend was relatively flat and rather reacted to other fundamental factors. Taking into account the forecast of analysts on the labor market, traders have already begun to take short positions in relation to the euro, making a bet on the growth of the US dollar. After the release of statistics, the EUR/USD rate went down, and only by September 11 did the rate recover. In this case, the position could be held for longer than 3 hours, but a triple swap, the risk of force majeure and volatility make it unprofitable.

Brief summary: 1. We monitor the trend behavior 3 hours before the statistics are released and compare with the forecast. It is better if the trend is horizontal. 2. We insure the position with stop orders, given the probability of slippage. 3. We open a position immediately after the release of statistics, a 5-minute delay can render opening the trade pointless. 4. Do not be greedy and do not panic: close the trade after 30 minutes, if there was no reversal or set a trailing stop (the length is individual) and exit the market 1.5-2 hours after opening the trade.

Pitfalls of Non-Farm Payrolls

At first glance, the essence of the strategy is clear. But now let us imagine a hypothetical situation: 15.30, the report is published, everyone rushes to buy the dollar with positive statistics. Suppose there are also those who sell it. Question: who will close the trades and at which point? Someone is quite happy with the profit received after 3 minutes (scalpers), someone - after 10. Any buy and sell (opening and closing of a position) affect the rate in one direction or another. And while in a long timeframe, the trend is relatively even and upward, then in a short TF (M1, M5) it will be fluctuating, because at this moment thousands of purchases and sales will occur.

This situation is hypothetical, but it explains in simple language why, the trend does not gain strength in a certain direction, but shows volatility immediately after the release of the report. Sometimes in the first minute the trend is gaining strength in one direction, tearing down stop orders, and then turns around sharply.

Pitfalls of Non-Farm Payrolls:

Unpredictability. Here I will return to the previous screenshot. Let me remind you that with the increase in the number of jobs on September 7, 18, from a revised 147K to 201K, we saw a relatively large increase in the dollar. And now let us look at the previous line:

Let me remind you that on September 7, 2018, the difference between the actual and the previous value amounted to 54K, between the actual and the forecast - 10K. And this was enough to move the dollar in the direction of visible growth. What we see on October 3, 2018: the difference between the actual and the previous value - 91K, between the actual and the forecast - 36K. The market definitely should have reacted to this much more strongly in August than in September

As you see in the screenshot, instead of the growth of the euro, we see a decline. Interestingly, analysts ignored this fact, preferring not to comment on it. One of the versions was the investor confidence in a strong US economy against the backdrop of trade wars with China. And partly this version is sensible. The fall of the Turkish lira and the continuation of trade wars, where the EU has suffered much greater losses in comparison with the United States proved to be a stronger factor, evening out the short-term influence of Non-Farm Payrolls. The result is a decline in the chart.

However, these are only opinions that clearly demonstrate the likelihood of short-term trading risk in fundamental analysis. Do you still want to trade on Non-Farm Payrolls?

The forecast of analysts is already factored in the rate of the currency pair. In part, this can be seen in the chart in the previous section. I have already focused on the fact that as early as 3 hours before the release of statistics, traders began to bet in favor of strengthening of the US dollar. And again I remind you that you can only earn money on Non-Farm Payrolls in the next 3 hours. If the statistics on the labor market in September disappointed traders who have been ahead of the curve, even positive statistics would have played against the dollar.
Failure to take into account the forecast for the market and the probability of the statistics revision. I have talked about this many times: even positive statistics can collapse the dollar if it is worse than the forecast.
Anomalies. There is a tale that puzzled many traders. The Non-Farm Payrolls report released in October 2013 was positive, but the dollar exchange rate sank quite strongly. There were no reasons for this and the last time such a situation was observed in the early 2000s. One of the theories is that one of the major players sold a very large amount of money too soon, but there is no confirmation of this version.

My opinion: it is better to close dollar transactions before the Non- Farm Payrolls and sit out the volatility. Or test your patience and just enjoy the risk.

Conclusion

Non-Farm Payrolls is one of the indicators of the US economy, but in order to earn money on it, you need a bit of luck. In addition to in- depth analysis, you need an understanding of market psychology and a quick response. The winners are those who managed to play against the market, had an instant reaction rate and reliable broker servers. Alas, traders who decide to get easy money can lose money quickly because of the volatility. Novice traders are recommended not to trade on the news. If you have questions about Non-Farm Payrolls report or Forex - join the [traders chat][2] or leave a comment!

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