NFP and Forex: What is NFP and How to Trade It? First of all, what is NFP? Non-farm payroll FX is an indicator designed to look at the impact of changes in payroll FX. This information is released generally during the week prior to the release of the FOMC minutes. Generally speaking, these releases cause large swings in the Forex markets; therefore traders need to know when to buy and sell! You might be wondering why the release of NFP will typically cause a large move in the markets, and here is why:
When you starttrading in the Forex markets, it is highly unlikely that you will understand every technical analysis tool available to you. Therefore, it makes sense for a beginner to become familiar with only two currency pairs – US Dollar/Great Britain Pound Sterling, and Japanese Yen/U.S. Dollar. Even though you can probably master the other more popular currency pairs (E.g. Swiss Franc / Canadian Dollar), NFP will usually be quite useful for your short term trading needs.
NFP is actually just a fancy way of saying non-farm pay; hence its use in predicting the state of the economy. Many Forex traders make their money by predicting when the unemployment rate will rise above a certain level – the so-called Phillips Curve. This way, the traders make a profit when the market sees an increase in unemployment figures. However, when the unemployment rate rises above a certain level, many traders will start to sell their Forex positions. NFP is designed to identify possible signals to buy or to sell and trade accordingly.
If you decide to starttrading with NFP, you should take the time to find out how to interpret the data. The interpretation of the NFP data depends on whether you are basing your decision on predictions from the non-farm payroll figures or on the gross domestic product figures released by the government. There are several differences between the two. When you base your decisions on the Phillips Curve, you have to go by a monthly plot that shows the unemployment rate against a corresponding benchmark. With NFP, you can look at the overall performance of the economy.
When you apply release data, you may get a lot of data that causes you to make several decisions based on the data. If you are basing your decisions on non-farm payroll figures, there is no way you can interpret them without interpreting them according to the month that they were released. Most people base their forex trading decisions on the first Friday of the month. If you want to make the most of your trades, you should try to find out when the NFP figures were released.
Many traders base their trades on un-perceived economic news releases. This is not a good thing when you are using the Phillips Curve to calculate the interest rates. Non-farm payroll figures released on the first Friday of the month can have very large and immediate effects on the NFP. While traders can use this information to exploit the interest rates, they will pay a steep price in the form of irrational volatility when they do.
The irrational volatility of news releases can be much more powerful than the steady changes in unemployment figures. In the short term, the upward sloping wedge between the unemployment and NFP numbers can cause large and fast fluctuations. This makes it very difficult to determine if the price is going to level off or continue climbing. It is much more accurate to look at the long term picture and use the Phillips Curve to estimate the interest rate.
You may think that it is not possible to profit from news releases due to the high risk involved in trading with volatile currencies. However, you need to consider that the risk associated with each trade transaction is inversely proportional to the potential gains you can make. Using the indicators that are based on historical information, you can profitably trade each currency pair. Since NFP and Forex are similar to the Forex indicator family, you can combine the two to form a single economic indicator that can successfully trade all currency pairs.