The Non-Farm Payroll Report Trading Strategy

The Non-Farm Payroll Report Trading Strategy

The Non-Farm Payroll Report Trading Strategy

The Non- Farm Payroll Report is usually announced the first Friday of every month at 8:30am EST. Active Binary Options traders tend to wait for the release of the NFP report because it nearly guarantees there will be movements in the market which provide opportunities to make money.  To view a full comparison of our recommended brokers’ and their payout rates – Click Here

The Strategy
The NFP is so important that it affects all major currency pairs, especially the all-important Great Britain Pound (GBP) and the US Dollar (USD) or the GBP/USD. Since Forex trading is open nearly 24 hours a day, seven days a week, traders from around the world are able to trade after the release of the Non-Farm Payroll report.

The strategy of trading the Non-Farm Payroll urges you to actually wait a little bit of time to allow for the price of currencies to flatten, allowing for the initial swing in price movement to pass.  Once market participants have had some time to digest the results of the NFP and what the numbers mean, day traders will have a better understanding of what direction assets will be moving.

By using this method of waiting for the storm to appear and then settle, day traders avoid getting into trades too early. Additionally. it lowers the possibility of being whipsawed out of the market before the asset has even moved in a direction.

The Rules
The rules of this strategy for trading the Non-Farm Payroll work with trading charts that are either 5 or 15 minutes.  The same rules may apply for both, but the example I will use will be with a 15 minute chart.  Since signals tend to appear on different time frames, it’s important to use either one chart or the other, not both at the same time.

There should be no trades performed within the first bar after the NFP report has been released (8:30 – 8:45 am).

  1. The bar that is created during the first period (8:30-8:45) will be wide ranging, as day traders will have to wait for the inside bar to occur after the initial bar. This does not necessarily have to be the very next bar, it could be one appearing later. So what day traders are waiting for is the most recent bar’s range to fit completely within the previous bar’s range.
  2. The inside bar’s high and low range, sets the potential triggers for trades. Then a succeeding bar finished either above or below the inside bar appears, and investors will usually trade in the direction in which the asset is breaking.  Market participants may also enter the trade as soon as the bar moves either above or below, without waiting for the bar to have closed. Either method may be successful, but try to stick with one or the other to develop consistency to your trading style.
  3. Enter a 30- pip stop on the trade that you had previously entered.
  4. There needs to be only a maximum of two trades made. If by chance both of your trades get stopped out, do not take a chance and re-enter. The inside bar’s will be used for high and low on the next trade, if needed.
  5. The target is a time target, as most of the moves will happen within a four hour time range. Thus, day traders tend to set the expiration time for four hours after they enter the trade.  An alternative for day traders that may wish to stay in the trade is a trailing stop.

Example

Figure 1: February 6, 2009. GBP/USD 15-minute chart. Time is GMT.
Source: Forexyard

NFP chart

Let’s use Figure 1 as our example.  The vertical line marks the 8:30 a.m. EST which is 1:30 p.m. GMT and is the release time of the NFP report.

Looking at the chart you can see there are three bars, or 45 minutes, of up and down action after the announcement was made. Traders do not trade during this time, that is until they can see the inside bar on the chart has a square around it. The bar with the square around it shows the price range which is fully contained from the previous bar. Day traders will join when a bar either closes higher or lower than the inside bar.

The next bar’s close is circled. This marks the entry which closed higher than the inside bar’s high. The stop is 30 pips below what the entry price ends, which is displayed by the thick black solid line that runs horizontally across the graph.

Since the entry happened at approximately 9:45 a.m. EST (2:45 p.m. GMT), the trade will close four hours later because of the expiry time set. Since entering the trade at a level of 1.4670 and leaving at 1.4820 four hours later, 150 pip were captured while only 30 pips had originally been risked.  Please note that every trade using this strategy may not be this profitable.
Negatives of the Strategy

This strategy may be very successful but it also comes with its own downfalls. Volatile markets can begin moving aggressively in one direction and then start to fade by the time the inside bar signal starts. Stated differently, if there were large movements prior to the inside bar; it is a possibility that a move may exhaust itself before the signal is even sent. Also, please remember that during periods of high volatility, rates are subject to change rapidly.This is the reason a stop order must be put in place.

 

The Bottom Line
The theory behind  the strategy of using the NFP report for trading as predicated is to wait for small consolidation, that is, the inside bar. Once the initial volatility of the announcement has eased and once the to wait for market begins choosing, no one knows in which direction it may head. By managing the risk  with moderate stop clauses, we establish opportunities for potentially major profits to be made from moves that are nearly guaranteed to occur when the NFP report is announced.


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