Guide to Trading the Nonfarm Payroll Report: Strategies & Tips
Investors seeking to understand a current snapshot of U.S. employment have a few monthly sources they can consult. There's the release of the unemployment rate, which is the proportion of the labor force that is not employed but could be.
A second source is the non farm payrolls report, which represents the total number of paid workers in the U.S., excluding those employed by farms, the federal government, private households, and nonprofit organizations. Non farm payrolls provide insight into the labor market, including job creation, employment trends, and the overall health of the economy.
In this article, we'll focus on the NFP report, including the NFP meaning in trading. Read on to learn more.
Understanding the nonfarm payroll report
The NFP report includes data on employment, unemployment, and average hourly earnings. Here's a breakdown of what is the non farm payroll component.
Employment change: Number of jobs added or lost in the private and public sectors over the previous month. A positive number means more jobs were added, while a negative number means more jobs were lost.
Unemployment rate: Percentage of workers in the labor force who are unemployed but actively looking for work. A lower unemployment rate is generally considered a positive sign, while a higher rate may indicate economic weakness.
Average hourly earnings: Measures the change in the price businesses pay for labor, not including the agricultural sector.
When is the nonfarm payroll report released
The nonfarm payroll is usually released on the first Friday of each month at 8:30 AM Eastern Time by the U.S. Bureau of Labor Statistics, which is part of the Department of Labor.
Here at moomoo, we help investors not only stay on top of the NFP release dates but other key economic report dates. To do so, they can look to our financial calendar. Each month we'll be updating the following NFP image so we encourage you to read our monthly piece.
And for investors interested in rising and falling sectors, check out moomoo's investment themes content.
How to analyze non farm payroll data
To review NFP data, it can be analyzed by reviewing the number of jobs created or lost in the previous month, as well as the long-term trend in the data. Here are additional ways to analyze NFP data.
Compare previous releases: Review historical NFP releases to get a sense of the employment situation and look at the actual figure compared to the median estimate, high and low ranges, and historic highs and lows.
Review key metrics: Consider the monthly change (number of jobs added or lost each month) and the year-over-year change (percentage change compared to the same month in the previous year) as well as the sector breakdown; this can also provide insight into how the sectors are contributing to job growth or decline.
Consider the impact: Use NFP data to make potential trading decisions and base your expectations on the results. For example, an addition of more than 100,000 jobs can be viewed as an indicator of a growing economy; an addition of fewer than 100,000 jobs as an indicator of a declining economy. Strong employment numbers could also indicate inflationary pressures, which might lead the Federal Reserve to raise interest rates.
Nonfarm payroll trading strategy
A NFP trading strategy typically revolves around the market reaction to the NFP report. This provides data on the number of jobs added or lost in the U.S. economy, excluding jobs in the farm sector, government, and a few other categories. With its impact on economic expectations and monetary policy, NFP data can lead to significant market moves.
Here’s a few ways investors are trading non farm payroll data.
Trading on news releases
The NFP report release can create a favorable environment for active traders, providing potential tradable move following its announcement, through potential profits and with losses.
To minimize volatility, an investor can wait for wide rate swings to subside after early speculators have taken potential profits or losses to profit on the real market move. But with all aspects of trading, profit is not ensured, so approaching the trade logically, based on how the market is reacting, can provide more consistent results than simply anticipating the directional movement that the event will cause.
Additional strategies
Here are some other strategies for trading NFP data:
Wait for the market to settle: After the report is published, wait for the market to settle, then set a small stop loss after a signal and close the position later.
Predict the market's direction: Trade before the report's release by predicting the market's direction. However, this is riskier because an unexpected figure could create gaps in the market.
Use technical analysis: This can help with trading decisions. For example, an investor can use five or 15-minute chart intervals in the NFP report.
Example of trading the NFP report
Analysts may have an expectation that the NFP report will show a moderate increase in jobs (e.g. 200,000 jobs added). A trader could use the EUR/USD currency pair to trade the report.
Before the report, monitor market sentiment by watching how the EUR/USD pair has been trading. If the market is anticipating a strong jobs report, the EUR/USD might have been trending lower as traders expect the U.S. dollar to strengthen. Identify support and resistance levels based on recent prices. For example, if EUR/USD has been trading between 1.0900 and 1.0950, these levels become important.
Also pre-report, the market is trading at 1.0920. A trader can place a buy limit order below the current market price at 1.0900 to prepare for a possible dip if the report is weaker than expected and place a sell limit order above the current market price at 1.0950 to prepare for a potential spike if the report is stronger than expected.
The report, released at 8:30 am ET, could shows 250,000 jobs added vs 200,000 jobs expected--stronger than expected growth. The market reacts with the EUR/USD spiking higher to 1.0950. The sell limit order at 1.0950 will be executed.
After this is executed, a trader can set a stop-loss order to limit potential losses if the price moves against them. For example, place a stop-loss at 1.0970 and also an order to capture gains if the price moves favorably. For example, place an order at 1.0900 for an anticipated pullback. After the market settles, check if the order was triggered or make an adjustment to the stop-loss order based on new market conditions.
Potential pros and cons of trading Nonfarm payroll
Potential pros
Market volatility: The NFP report often causes significant market volatility, creating potential opportunities for traders to undergo possible profits in a short period.
High liquidity: The heightened interest in the report typically results in high trading volumes, making it easier to enter and exit positions.
Predictable impact: The market often reacts strongly to NFP data, making it somewhat predictable. For example, strong job growth may lead to expectations of tighter monetary policy, which can impact currencies, stocks, and bonds.
Economic Insight: The NFP report provides valuable insights into the health of the U.S. economy, which can be used to make informed trading decisions or adjust broader trading strategies.
Potential cons
High volatility risks: The same volatility that can offer profit potential also increases risk. Price swings can be extreme, potentially leading to significant losses if the market moves against the investor's position. Rapid price changes can result in slippage, where trades are executed at prices different from those anticipated, affecting trade outcomes.
Unpredictable reactions: Sometimes, the market may react irrationally to the report. For instance, the initial price move might not reflect the long-term trend, leading to potential losses if an investor trades based solely on the initial reaction.
Pre-report uncertainty: Traders may take a position ahead of the report based on speculation, which can create noise and uncertainty in the market. This speculative positioning can lead to unexpected price movements.
Short-term focus:Trading around the NFP report often focuses on short-term price movements, which might not align with longer-term investment strategies or trends.
FAQs about trading data from nonfarm payroll reports
Why is non-farm payroll important?
NFP is considered one of the most important macroeconomic reports in the world. It provides information about the labor force that can impact the economy, stock market, and other factors.
Is a higher non-farm payroll good?
A higher payroll figure is generally good for the U.S. economy, citing more job additions and robust economic growth. Forex traders and investors look for a positive addition of at least 100,000 jobs per month. Any release above that figure or the estimated consensus will help to fuel U.S. dollar gains.
How do you predict NFP direction?
There's a few ways to predict NFP direction. Markets may try to do so before it's released by averaging the predictions of professional analysts. If the actual report is significantly higher or lower than the consensus, it can cause a major market move. Additional ways can include:
Unemployment rate: If the unemployment rate drops, traders may favor the dollar, which can be good for the US economy.
Manufacturing payroll: If manufacturing payrolls increase, traders may favor the dollar.
Previous release: If the previous release was very weak, traders may expect significant improvements in the current release.
How does Nonfarm Payroll affect the stock market?
NFP data can affect the stock market in a few ways. This can include the following:
Strong report: Investors may feel confident about the economy and stock prices may rise. Companies may also have more revenue to invest in growth.
Weak report: Investors may become concerned about the economy's health. However, if employment is low, the Fed may slow or pause rate hikes, which could increase stock prices.
Numbers above expectations: The market may be surprised and have a positive reaction.
Growth reversal: A reversal in nonfarm payroll growth can lead to US stocks changing 2–3 months later. For example, if the annual increase in nonfarm payroll falls under 2 million and continues to decline, US stocks may turn bearish.