Trade the non-farm payroll report (NFP) to capitalize on one of the biggest forex market moving events of the month. Here are a number of ways to trade it.
On the first Friday of each month, at 8:30 AM EST, the non-farm payroll (NFP) data is released. The report reveals the US employment situation, shedding light on the strength of the economy. The report causes a massive reshuffling in positions, and seeing a 75 to 100 pip move in the GBPUSD in the minutes and hours following the announcement is quite common. During volatile times, when overall movement is already quite high, the report can cause moves of 200 pips or more.The GBPUSD is the preferred pair for this strategy.
This strategy uses the GBPUSD and a 15-minute chart. A 15-minute chart allows the initial volatility to subside, yet capture a large potential move once traders make a decision on weather they want to buy or sell based on the news.
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The Simple NFP Forex Strategy
1. Do nothing for the first 15 minutes after the NFP announcement. A wide-ranging price candle will occur between 8:30 to 8:45 AM EST.
Never hold a day trade through the data release. Take trades after the NFP report is released, not before.
2. Wait for an inside candle. An inside candle is a 15-minute candle where the high and low are completely inside the prior candle.
3. The high and low of the inside candle become our trade triggers. If the price rises above the high of the inside candle, buy. If the price drops below the low of the inside candle, sell.
4. Place a stop loss below the most recent low if you bought, or above the most recent high if you sold. Your stop should not exceed 30 pips. If your stop loss exceeds 30 pips, don’t take the trade.
We do not need to wait for a candle to close/complete in order to enter a trade. As soon as the high or low of the inside candle is pierced, take the trade.
5. Exit 4 hours after your entry. This is a timed exit. Once the trend begins it will often last for about 4 hours. If you enter at 9:15 AM, exit the trade at 1:15 PM EST.
* Exit at 2:00 PM EST even if it has not been 4 hours since your entry. By 2:00 PM other factors are likely to start affecting the pair, and most of the movement based on the NFP number will be exhausted.
While timed-exit worked very well in the past, it seems to not be working as well post-2016. Watch to see if it comes back into favor, but in the meantime, I recommend setting a target price at a 2:1 Reward risk ratio. For example, if your initial risk is 20 pips, set a target at 40 pips from your entry. Over time, if you notice you can extract more profit from these trades, adjust the target to 3:1.
6. Don’t take more than 2 trades in one day with this strategy. If you get stopped out on 2 trades, the movement is too choppy. Stash the strategy away until the next month.
7. This step is optional. Implement a trailing stop loss to avoid giving up your profit if the trend reverses while holding the position. As the trend progresses, move the stop loss to just below recent swing lows if you are long, or just below recent highs if you are to short. You could also use a moving average or some other indicator as a trailing stop loss.
Figure 4. shows a whole GBPUSD NFP trade. The trade produced about a 54 pip profit at the 4-hour time target. The original risk was 25 pips, but could have been trailed up, locking in a profit after the first consolidation. Sometimes wins will be much bigger and other times slightly smaller.
Below is another example. The timed exit produced a profit of 24 pips. The 2:1 or 3:1 target method worked better, capturing nearly all the downside movement after entry. The 2:1 target nabbed 32 pips, while the 3:1 target profited 48 pips.
The pitfall of this simple strategy is that it can experience strings of losses. There is very little subjectivity in the strategy, so the price action complies and produces a profit or it doesn’t. There isn’t much the trader can do when the market isn’t complying except adjust the targets or opt not to trade the strategy.
The worst days are when 2 false signals occur back-to-back on the same day. This why the reward:risk is a good alternative exit method. It assures that we are making at least twice the amount on winning trades that we lose on losing trades. One winner makes up for two or three losers (depending on the reward:risk we use).
1 Contract = $1000 USD
2 contracts = $2500 USD
5 Contracts = $5000 USD
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