Why Non-farm Payrolls Matter to TradersThe Non-Farm Payroll (NFP) report is often followed closely by sophisticated traders, but new traders often seem to overlook it. In today’s TradingView educational post, we’ll explain what NFPs are and why they matter.
The NFP report is a crucial monthly indicator that shows the net number of jobs added in the U.S. during the previous month, excluding those in farming, private households, and non-profit organizations. This report gives a clear-cut view of private sector jobs and how they’re growing or shrinking. Traders can often use this data to forecast Federal Reserve actions, such as adjusting interest rates.
Why does the Federal Reserve care about NFP reports? And by extension, why should traders care? The Federal Reserve (the Fed) has a dual mandate: to support maximum employment and ensure price stability in the U.S. economy. Consequently, the Fed reviews NFP reports when making decisions about interest rate policies. Strong employment data might prompt the Fed to raise interest rates, while weak data could lead to rate cuts.
The question now becomes: how do forex traders deal with NFP reports? It’s crucial to note that an NFP release can often lead to increased volatility in USD markets, making trading in that window riskier than usual. Experienced forex traders with open positions are generally prepared for the heightened volatility that NFP releases can bring. This volatility typically comes with larger spreads, volume increases, and potential liquidations or margin calls due to sudden market moves.
Because of this, some traders opt to close all open positions before an NFP release, re-entering the market afterward. Others may choose to avoid trading during these periods altogether. The first market reaction can be unpredictable, with computer programs, scalpers, and high frequency trading often dominating the initial action the second the report is released.
So, let’s review everything we’ve discussed here: the NFP report gives insights into the private sector economy, specifically looking at how many jobs were added in the US the previous month. The Fed looks to the NFP report to understand the current labor market, and traders watch the NFP report for reasons such as:
1. US Dollar strength or weakness
2. Insights into what the Fed might do next
3. Volatility, spread, and volume spikes
4. Risk management
5. Preparing a game plan for before and after the report
Thanks for reading our latest educational post about becoming a swing trader! Be sure to follow us for more updates and educational resources like this.
