How to Trade the Non-Farm Payroll Report: A Detailed Guide
If you are intrigued by the prospect of trading binary options using fundamental analysis, you’ve probably already heard of the non-farm payroll report (NFP). This is probably the single most popular report to trade off of in Forex, commodities, and other markets. You can also trade the non-farm payroll report when you’re trading binary options. You should always have a system to set entry and exit rules.
You cannot just randomly place trades around when the report comes out and expect to win (in fact, if you do that, you actually are more likely to lose since reports cause whipsaws and other forms of unpredictability). You need to have a method. In this article, I will teach you one simple system you could use to trade the NFP. You may be able to use it as is, or you may decide to make changes to it to make it work better for you. Or you might find a completely different system in the end. Either way, learning and testing this method should get you started understanding financial report trading.
Quick Editors Note: Looking to trade the non-farm payroll that is coming out? I recommend Nadex for U.S.A traders. I have a series of trading on nadex guides you can read to get up to speed and make some money on this report.
What is the Non-Farm Payroll Report?
Before you start trading any news release, you should at least know what it means. “Non-farm payroll” may sound fancy and complicated, but the term is actually really precise. All it means is the payroll report for all employees in the US who do not work on a farm. Since farm workers are basically seasonal employees who earn money (or not) based on the time of year, the government doesn’t include them in this report. The non-farm payroll report is also known as the unemployment report. This is why it is a massive market mover, especially during these recession times when everyone is so interested in the unemployment report as an indicator for the economic recovery of the country. The NFP has always been considered a measure of national economic health.
A Tip on Trading Fundamentals
One of the first mistakes made by beginning traders is to trade fundamental news like the NFP as if the news existed in a vacuum. In other words, without comparing the news to the expected news. Before any major financial report comes out, there are always projections made by experts. Economic experts attempt to guess what the NFP numbers will be. When you trade the NFP, you are trading the difference between the projection and the reality, as opposed to simply trading the numbers.
So, for example, let’s say that in our hypothetical fiction, the unemployment rate in the most recent NFP report was 8.1%, and analysts were predicting a major decline in unemployment to 7.7%. Then let’s say that the NFP for this month comes out, and the number did drop, but only to 8.0%. You might think, “Great, the unemployment rate dropped,” and expect that to reflect optimistically in the markets, but you would probably be wrong. Since the decline was so much less than what experts expected, the mild decline could be seen as disappointing, and could actually shatter confidence in the recovery of the economy. In that case, you would be completely wrong about the significance of the news.
Should You Trade Directionally?
Should you try to trade in a specific direction or not? It depends completely on your trading method and on how well you know the market that you are trading. In my example system (included below), you do not need to know which direction the market will move, only whether it will move significantly or not.
Whether or not you can actually take advantage of non-directional trading will also depend on your broker, though. A broker offering double one touch trading would accept a trade without a direction, and allow it to trigger up or down. A broker that does not offer that would force you to choose a direction, in which case you will need to modify the system to include a prediction on the directional movement.
The direction of movement for a given trade would depend on a number of factors, including the asset which you are trading and its connection to the unemployment rates. In some circumstances you might even be able to place boundary trades. Usually report data moves the market, but if you expect less movement based on the report, you could feasibly trade that prediction as well.
Example of an NFP Trading System
Here is an example of a very simple NFP trading system. This one does not tell you what direction to trade. It only helps you trade a breakout without being caught up in the initial whipsaws that are common when reports are first released to the public. You can see when reports are going to be released by checking an economic calendar.
1.Set up your chart in your charting software so that you can see bars or candlesticks, whichever you prefer. Set your chart to 15 minutes. (For more help with step 1 – click here)
2.Get your binary options trading platform open and ready to go if you are trading live. You should test your trades on a particular financial instrument (or set of instruments) that you plan to trade live. Be looking at those assets in your trading platform. (Check the trading platforms out)
3.Know the exact time the NFP is going to be released. Wait for the first bar to form after the report comes out and do not place an entry. You want the initial whipsaws to resolve, and just skipping out on this first bar can remove a large degree of risk when trading a report.
4.Wait for an inside bar to form. The open and close of the inside bar need to be completely inside the open and close of the previous bar. This generally shows temporary consolidation, often leading to a breakout.
5.When a bar closes above or below the inside bar, that often indicates the breakout of a trade in the direction of the new close. How far above or below is something you will need to determine through testing. Learn about support and resistance levels here.
6.Enter into a trade on the break of the inside bar as indicated. Most of the action will likely resolve within four hours, so trading the NFP is ideal for binary options. Most brokers specialize in offering day trades only (not trades which continue over into the next day), so choose an expiry time within the four hour period. This is something else which you can optimize with testing. (How Much Testing is Enough?)
As far as dealing with the direction of your trade, this is easy if you are allowed to do a double one touch trade (read more about one touch trades here). You choose a trigger point on either side of where you will be entering the trade, and then just wait for price to break out in either direction. If you cannot do this, you will want to be sitting actively at your computer waiting to see which direction price breaks. You will have to be ready to immediately enter into a trade up or down depending on what happens. Alternately, you could add indicators or some other methodology to this system to help you determine in advance which direction price will move, set up the trade, and wait.
Dora the day trader trades the NFP. She trades oil and gold only, because these are the assets she has successfully tested. When today’s NFP comes out, she has her chart open and her trading platform ready. She waits for the first bar to form, which is a wild whipsaw up and down. Then she waits a couple more bars until there is an inside bar, at which point she waits for the next bar to form. It breaks above the previous bar. Her broker is offering a High/Low trade on oil which will close in an hour. She has tested this expiry period successfully in the past, so she enters High on oil. Price breaks upward as predicted, and an hour later, she has won on her wager.
Is Trading News Reports for Everyone?
News reports are certainly exciting, and with the daily and weekly economic news posted on so many binary options broker websites, many new traders just assume that news reports are something they should be trading. There are certainly many benefits to trading the NFP and other news reports; they can help you to structure your trading schedule, and they offer you the chance to profit off of massive market moves. Brokers that allow doubling up or rolling over may help you to take advantage of some of the big moves. Reports can cause movement even in markets which are otherwise not going anywhere fast, which can give you a chance to profit in quiet times.
There are drawbacks to trading news reports, however. The main drawback is the high level of unpredictability associated with reports. Reports cause whipsaws, spikes, and other choppy conditions, and more traders lose money on fakeouts than make money on breakouts. Waiting for that first bar to close can help to spare you from losing money, but that does not mean that trading reports isn’t still quite challenging. Traders who do not excel with trading reports often avoid trading at all when reports are released. If your trading system does not use reports to profit, you may not even want to enter into trades during these fickle times.
Test, Test, Test
The number one rule to follow if you are going to trade news reports like the non-farm payroll is to test your method before you go live. With news trading in particular, there are so many variables which can cause you to win or lose. Testing your binary options trades on historical data and then demo testing your system with virtual money will allow you to fine tune various aspects of your trading process, including:
- Whether to enter a trade on the break of an inside bar immediately, or whether to wait until the next bar closes before entering the trade.
- How long to stay in your trade. What expiry time should you set if you are using Option Builder?
- Which assets to trade.
- How to deal with directional trading.
- Whether or not to double up or rollover, and any special rules for early closure.
You could try to figure all of that out when you trade live for the first time, but just think how much money a mistake could cost you. And since you are bound to make more than one mistake, that means a lot of lost cash if you just dive in without figuring out all these details. This is why it is so important to test first; you can make your mistakes on paper without losing a dime, and then when you are really ready to start profiting, you can enter the market with real money. Even though the idea of waiting may make you impatient, you will thank me when you start catching mistakes during testing!
This video shows you how to trade the non-farm payroll