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 (sometimes the second), 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.
On a typical Friday, the GBPUSD will move approximately 110 pips (10-week average as of Nov. 2, 2017). On a non-farm payroll release day, intraday movement could be much larger.
Typically the GBPUSD has more movement than the EURUSD, which is why the GBPUSD is the preferred pair for this strategy. That said, the EURUSD can also be used if overall daily volatility is similar to or greater than the GBPUSD. I typically look at both pairs after the NFP release and determine which one is the better candidate for these strategies based on how they are moving (I don’t trade both).
Below I discuss a simple strategy and an advanced strategy. I call the first strategy “simple” because there is little discretion or subjectively involved in taking the trade. If we get a valid signal (based on the rules), we take it. This is fine, but my personal performance is better with the more advanced strategies discussed later on. That said, the advanced strategies are more subjective and may be harder for some people to implement. Therefore, practice each strategy and utilize the one you trade best with.
The Simple NFP Forex Strategy
This strategy uses the GBPUSD and a 15-minute chart. A 15-minute chart allows the initial volatility to subside, but still allows us to capture a large potential move once the market participants make a more rational decision about whether they want to buy or sell based on the news. This is the trend this simple non-farm payroll forex strategy attempts to capture…the rational trend which follows the initial price volatility after the news release.
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. The wide-ranging candle should be 40 pips or greater, assuming average daily volatility is around 100 pips. If average daily volatility were to expand to 150 pips, we would want to see a wide-ranging candle of at least 60 pips. If the candle following the news event is smaller than this, then it is better not to use this strategy. Never hold a day trade through the data release. We 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.
Figure 1. Wide-Ranging and Inside Candle for Simple NFP Forex Strategy – 15-Minute Chart
Figure 1 shows a wide-ranging candle followed by an inside candle. The inside candle doesn’t always immediately follow a wide-ranging candle. Depending on volatility and the strength of the initial push, we may need to wait for a couple candles in order for an inside candle to occur. The inside candle doesn’t need to be inside the wide-ranging candle either, we just need a candle that is inside the prior candle. This shows us the market has calmed down and is likely to soon choose its more rational direction.
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 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.
Figure 2. Simple NFP Forex Strategy Entry and Stop Loss Example – 15 Minute Chart
In figure 2, the initial inside candle that followed the wide-ranging candle is used for the trade trigger. Following the initial inside candle, two more inside candles followed. Here is where a little subjectivity can be used: use the most recent inside candle for the trade trigger, or use the original one. If the price forms a little range like it did here, you may want to wait for a breakout of the range (the original inside candle in this case). That said, trading a breakout above the most recent inside bar (the green candle to the left of the arrow), would have resulted in a bit lower entry and a tighter stop loss.
The horizontal blue-dotted line shows the entry, which is set one pip above the inside candle high. The dotted line in the lower part of the screen marks the stop loss order. The stop loss is placed below the recent candle lows because this was a long 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 this method 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. Targets are very dependent on overall volatility.
The chart below shows volatility over time in the GBPUSD. When I originally published this strategy in 2011, volatility was about 40% to 50% higher than it is in late-2017. Overall volatility affects strategies and is something you should monitor. When average daily volatility is around 100 pips, if your stop loss is 20 pips, you will likely be able to attain 40 to 60 pips on a winning trade (2:1 to 3:1 reward to risk). If daily volatility is up around 150 pips you may be able to extract 60 to 80 pips (3:1 to 4:1 reward:risk), and with greater volatility the 4-hour timed exit may also begin to work well again.
Figure 3 – Historic GBPUSD Daily Average Volatility in Pips
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 short. You could also use a moving average or some other indicator as a trailing stop loss.
Figure 4 shows the whole GBPUSD trade for the October 22, 2013 NFP release. In a rare event, the data was released on a Tuesday due to the US government shutdown on the Friday the data was supposed to be released. 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.
Figure 4. NFP Forex Strategy in GBPUSD with Entry, Stop loss and Timed Target – 15-Minute Chart
Source: My Forex Broker FXopen
Below is another example from Oct. 6, 2017. 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.
Figure 5. GBPUSD NFP Forex Strategy with Entry, Stop loss and Targets – 15-Minute Chart
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).
Advanced NFP Forex Strategy
This advanced forex strategy combines multiple concepts of price action trading, and utilizes them when the market is most volatile…like after a NFP data release. These concepts don’t only work during news. Use the same concepts to improve your trading at any time.
For the advanced strategy, a 1-minute chart is used instead of a 15-minute chart. Using a 1-minute chart means we may end up entering and exiting multiple trades within the hour or two following the NFP release. Multiple trades, all with 2:1 or 3:1 reward to risk ratios, means more potential profit in our pockets.
Because we can potentially make more profit we need to do more “work.” The advanced strategy requires constantly re-assessing the price action and what it is telling us. We may be taking a long trade one minute, and then a short trade a few minutes later.
Our overall goal is to trade in the direction of the dominant trend. This is usually pretty easy to spot. The tricky part is getting into that trend at a good time, and also being able to tell when the price is reversing or just pulling back. There are multiple stages to this strategy. Please read to the end of article before attempting to implement any single element.
Trade In Direction of Initial Big Move
Let’s look at the first trade which often occurs following an NFP release: a trade in the direction of the initial move.
1. After 8:30 AM EST, watch for the price to move at least 30 pips higher or lower on your 1-minute chart. If the price moves up 30 pips or more, we will be watching for long trades. If the price drops by 30 pips or more, we will start watching for short trades.
2. The price just had a big move either up or down. We now wait for a signal to enter a trade in the same direction as that initial move. From the high or low of the big move, the price must pullback or stay below high or above the low for at least 5 bars. Basically, we want the price to retrace some of the big move. Draw a trendline along the candle highs of this pullback if the initial move was up, or draw a trendline along the candle lows of the pullback if the initial move was down. We then want to see the price breakthrough that small trendline in the trending direction.
A trendline won’t always fit along the pullback. Basically, we are waiting for a strong move in the trending direction that indicates the pullback is over and the price is likely to start moving in the same direction as the initial move. Therefore the price could make a triangle or a small range then breakout of it, or form a small angled channel and then breakout of it. We are waiting for some type of breakout trigger that indicates the pullback is over. If the price doesn’t provide a trigger in the same direction as the initial move, we don’t trade.
3. If the initial wave was up, buy when the price breaks above the trendline or makes a strong move up out of the pullback. If the initial wave was down, short when the price breaks below the trendline or makes a strong move down from the pullback.
4. Place a stop loss one pip below the most recent low if long, or one pip above (plus the spread) the most recent high if going short.
5. Place a target equal to half the distance of the initial move. In figure 6 the initial move was 115 pips up before the price formed the pullback. Therefore, once we get a buy signal a target is placed 57 pips above the entry (half of 115, rounded down). Alternatively, place a target at a 3:1 reward:risk ratio. This usually works out to about the same price target. As the image shows, the risk on this trade was 18.3 pips, multiplied that by 3 and the target would be 54 pips. If you want out of your trade sooner, use a 2:1 or 2.5:1 reward to risk.
Figure 6. EURUSD NFP Forex Strategy with Entry, Stop loss and Target – 1-Minute Chart
Sometimes the price will pullback for many bars without giving a trade signal. If the price pulls back 50% or more of the initial move we can use an alternate trade setup. Once the price has pulled back 50% or more, watch for any consolidation that is two bars or more. A consolidation is two (ideally three) or more bars that move mostly sideways. Then trade a breakout of that consolidation (price moves above the consolidation high or below the consolidation low), but only if the breakout occurs in the same direction as the initial move.
For example, assume the price drops 60 pips after the news announcement before forming a pullback. The price pulls back 30 to 40 pips (that is more than 50% of the 60 pip drop) without providing a trade signal based on the strategy above. In this case, watch for the price to move sideways for 2 or 3 (or more) price bars. If the price drops below the low of that consolidation, enter short. If the price rallies above the consolidation, there is no trade since the initial move was down.
If the initial move was 50 pips to the upside, and the price pulls back more than 25 pips (but not more than 50 pips) without providing a trade signal based on the strategy above, then start watching for consolidations. If a consolidation forms, and the price breaks above the high of the consolidation, enter long. If the price breaks below the consolidation there is no trade because the initial move was up.
For multiple examples of this approach see How to Day Trade Forex in 2 Hours or Less. The only difference is that following news we typically have bigger price waves than when there is no news. The concepts are same though. We have a strong move in one direction, then we are waiting for a pullback and then a small price pattern (such as a consolidation breakout) that tells us the price is starting to move in the tending direction again.
It is possible that the price could have a big initial move, then pullback or even have a deep pullback, and yet no trades are triggered. When this happens it is usually because the price just keeps reversing the initial move. For example, if the price initially rallies but then just keeps dropping after that, we likely won’t get any buy signals. Or if the price initially declines, but then starts rallying relentlessly, we won’t get any sell signals. That is fine. The next part of strategy looks at what to do if the price reverses the initial move.
Reversal of Initial Move
Sometimes the price doesn’t keep going in the direction of the initial move. The price may rally 50 pips initially and then start falling, and keep falling. Or the price may drop initially, and then just keep on rallying. When this happens, if we took the prior trade signals they would likely have resulted in a loss. Yet once we know a reversal is occurring, we may be able to make some of our money back or even produce an overall profit over several trades. It’s also possible that the price reverses without triggering any trades in the direction of the initial move.
A reversal occurs when the pair moves past the starting point of the initial move (8:30 price) by at least 10 pips. For example, assume the GBPUSD is trading at 1.3000 at the time of the release. It shoots up to 1.3075 and then falls all the way back below 1.2990. In this case, the entire up move has been erased, and the price is now below where it started when the news was released. When the price moved up, we were looking to buy on the pullback, but once it moves below the starting point our bias can no longer be to upside.
In this case, we now will wait for the price to bounce, and then look to short it using either of the methods mentioned prior. Since the trend is now down we will wait for at least a 5 bar pullback which we can draw a trendline along (or for a triangle, range, or angled channel to form). When the prices breaks below the trendline (or out of these patterns), we go short. If the price keeps rallying we will watch for a deep pullback trade signal.
Figure 7. EURUSD NFP Forex Strategy with Trend Reversal – 1-Minute Chart
Wait for the actual trade signal to occur. In Figure 7 the price initially rallies. It pulls back at least 5 bars and forms two consolidations, but the price never rallies above the highs of the consolidation. Therefore, no trades. The price continues to drop, falling below where the rally started. The trend is now down so we are looking for short trades. Two consolidations form during the pullback. The first doesn’t trigger because the price doesn’t drop below the consolidation low. The next one does trigger us into a short trade.
A stop loss goes above the recent high (because we are going short) and our target goes half the distance of the initial move below our entry. The initial move in this case was 56 pips, so our target or profit potential is 28 pips. Our risk on this trade ends up being about 10 pips, which once again means our reward:risk is very close to 3:1….so if you find it easier, just use a 3:1 reward:risk. A trailing stop loss or a 2:1 or 2.5:1 target also work.
I typically only day trade for up to 2 hours, but sometimes I may need to hold one of these trades a bit longer. The power of the strategy is in the reward:risk ratio. If we let the price hit our stop loss or target we are usually winning 2 to 3 times as much as we would lose, and once we get good at this strategy we should be able to win more than 50% or our trades, and eventually more than 60%. Therefore, it is often best to just take the simple approach and let the price hit the stop loss or target once in a trade. Don’t try to interfere too much unless you have a reliable trailing stop loss method.
For more on reversal strategies, see The Strong Trend Reversal Trading Strategy.
You’ll have much more success if you think about what the strategy is trying to accomplish, instead of trying to blindly follow rules. With the simple strategy we are watching for the big move and then letting volatility subside (the inside bar). We are then waiting until the price moves above the high or low of that inside bar, anticipating that volatility and the trend could expand in that direction. We won’t be right all the time, but since our profit potential is greater than our risk we don’t have to be right all the time.
With the advanced strategy we need to be more in tune with what the market is telling us. Basically, we are viewing the initial move or a reversal as our trend direction. We wait for a pullback and then take a trade when price starts moving in the trending direction again. Our trade trigger could be a consolidation breakout or a small trendline or pattern break.
Whether it is a trendline break or a consolidation breakout doesn’t really matter. Don’t focus on that. The real key is watching the price and noticing the shift back in the trending direction, which indicates the pullback is likely over. This shift is visible without drawing trendlines or a line along consolidations. Yet, these tools may help you when you are starting out.
Keep risk to less than 1% of your account value on each trade. This is accomplished through proper position sizing. If you are using the “half the initial move” profit target, make sure that your profit potential is at least two times your risk. If it isn’t, skip the trade.
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By Cory Mitchell, CMT