Day Trading Strategy on NFP Release

The NFP report is one of the most anticipated news releases for many types of forex traders, including day traders. How do we apply the strategy?

The Non-Farm Payroll (NFP) data report is a key economic indicator in the United States and, thus, in the global market. It contains data on the US employment situation, which reflects the strength of the country's economic condition at that moment.

The NFP report shows the number of jobs added and other labor market data across various industries, except for the farming, government, private households, and nonprofit sectors. The US Bureau of Labor Statistics releases the report on the first Friday of each month (sometimes the second) at 8:30 AM EST.

The NFP report is essential data representing how well the US economy is doing. Interestingly, these numbers can lead to significant currency price movements. The report is often said to be one of the largest market movers in the forex market.

It's common to find 75-100 pips movements in the GBP/USD in the first few hours following the report announcement. The data might even cause 200 pips movement or more during high volatility.

That is why many forex investors like to keep a close eye on the NFP report, making it one of the most-anticipated economic news of the month. Understanding the data can help them decide the best timing to enter and exit the market for the best possible outcome. So, let's dig deeper and figure out how to use the NFP report for day trading.

NFP Day Trading Strategy

You can use several strategies to incorporate the NFP data report in forex trading, which varies based on traders' level of expertise and trading style. Here is the step-by-step guide:

Step 1: Assess the Situation

Once the data is released, many traders would start to scan the information and decide which currency they should invest in based on the data. If the unemployment rate is lower than the previous report, but the payrolls for non-farm workers are higher, then it shows that the dollar will be stronger than the euro.

This typically leads to traders purchasing the dollars, hoping the value will continue progressing. On the contrary, if the unemployment rate is high, but the payrolls are low, traders would assume that the dollar will weaken, so they purchase the euro instead.

In the meantime, day traders must wait and see what other traders are doing before making their moves and entering the market. If other traders are buying the dollars, day traders should open long positions, but if the traders are buying the euros, day traders should open short positions.

Note that all of that can happen in a blink of an eye – usually within minutes of the report's release. The price might fluctuate in the first minute or two, but they tend to stabilize and move in a certain direction.

Step 2: Open a Position

Before opening a position, creating a list of criteria for entering and exiting the market is essential. One of the common trade setups for day trading is 30 pips, but it's not necessarily the best option that works in all conditions. The number must be adjusted according to the initial move. The bigger the initial move, the better it tells the price direction.

Once the initial move happens, there is usually a price pullback that can be interpreted as the entry signal for day traders. If the price moves upward, use one-minute price bars and draw a trendline from the high of the initial move to the high of the price pullback. Open a buy position when the price breaks above the trend line.

The same method applies to initial moves going downward but in the opposite direction. Once the initial move occurs, draw a trend line from the low of the initial move to the low of the price pullback. Open a sell position when the price breaks below the trend line.

In addition, don't forget to put a stop loss and take profit as exit points. Using a 5-price-bar method, set a stop loss one pip below the previous swing low. Place the stop loss one pip above the previous swing high if it's a short position.

As for the profit target, you can use the difference between the opening price and the initial move cut in half. For example, if the initial move is 100 pips, the profit target should be at least 50.

Step 3: Calculate the Risks and Position Size

Now, you also need to have a good risk-to-reward ratio. The potential risk refers to the distance from the entry point to the stop loss level, whereas the potential profit or reward refers to the distance from the entry point to the take profit level.

You can choose any ratio you want, but typically traders use at least 1:2 to be safe. This means you should ensure the reward potential is at least twice the risk potential.

Apart from that, the size of your trade is also very important. It's best not to invest more than 1% of your entire portfolio in a single trade. In other words, the size of the potential trade risk multiplied by the number of lots you buy should not be more than 1% of your account size. If you have, let's say, $10,000 in your account, you can only risk up to $100 per trade.

Easy Short-Term NFP Trading Strategy

Here is a simple short-term trading strategy for the non-farm employment change release:

• Thirty minutes before the release, examine the chart and identify the highest high and the lowest low recorded in the past four hours.
• Place two pending orders: a buy pending order placed 5-10 pips above the highest high and a sell pending order placed 5-10 pips below the lowest low within that range.
• Set stop losses for both positions: the stop loss for a long position should be set at the sell pending order price, and vice versa.
• Wait for the news release, activating one of the pending orders. Remember to cancel the other pending order.
• Setting a target price equal to the distance between the high and the low is recommended. Use the following formulas to determine the target:
  • Buy order + (high before release - low before release)
  • Sell order - (high before release - low before release)

Example:

Using a 5-minute chart for EUR/USD, the highest high is 1.1384, and the lowest is 1.1362. A buy pending order is placed at 1.1389, and a sell pending order is at 1.1357. Stop losses are set at 1.1357 for the buy order and 1.1389 for the sell order.

Following the release, a large bullish candlestick indicates strong market momentum. A take profit order is placed at 1.1411, and the sell order is canceled. Subsequently, the price begins to decline, resulting in a profit of +22 pips.

How Does the NFP Report Affect the Forex Market?

Every NFP report consists of three important data: the NFP numbers, the unemployment rate, and the hourly wages. These data provide information about the current state of the country's economy and give an idea of what the future holds.

If the numbers on the NFP report are lower than expected, it shows that the economy is not doing great. Companies won't hire many new people and might even fire some employees. Subsequently, those people would lose income and reduce their spending power, causing the economy to slow down.

On the other hand, if the numbers are higher than projected, the economy is doing well, and companies might hire new employees. Consumers with enough money and a stable job tend to spend more, boosting the economy.

Now, the country's economic condition is strongly tied to the value of its national currency, which in this case, is the US dollar. Therefore, a good economy and positive numbers on the NFP report can encourage growth in the US dollar's price, while in contrast, slow economic conditions and low NFP numbers often lead to a drop in the US dollar's price.

When the latter happens, the government might release a loose monetary policy to fix the situation. This usually involves lower interest rates that can reduce demand for the Dollar.

For regular traders, what's important is to be able to choose which currency they should side on based on the data report. However, if you're a day trader, you'll need to wait and see what other traders are going for before you start trading.

Final Thoughts

Trading with news releases is not easy. Speculating on the direction of a currency pair during a news release can be risky because of the extremely high volatility. While it is true that the release of the NFP report can bring a huge opportunity to earn money, it's not completely assured.

The truth is that we'll never know for sure how the market is going to react or where the price is going to move next. That is why taking precautionary steps and preparing good risk management to reduce the risks is highly important.

Another thing that you need is enough practice. Remember that there are many strategies to choose from, but not all can help you reach your goals. For instance, some people like to wait for five price bars before drawing the trend line, while others claim that less or more works better.

Therefore, you must explore different ideas and see which works best for you. For a risk-free practice, you can try trading on a demo account before going live with real money.