How to trade Non-Farm Payrolls (NFP)
Reading time: 13 minutes
The first Friday of every month is an important day for investors, traders, and pretty much everyone involved in the financial markets. Whether you trade currencies (commonly referred to as ‘Forex’ or just ‘FX’), stocks, bonds, or commodities, the US employment report lands at 8:30 ET and 12:30 GMT and is arguably the most important economic print released.
One metric within the employment report that often increases volatility across key asset classes is the Non-Farm Payrolls (NFP) print. A surprise result, along with other closely watched data, can open the door to tradeable opportunities for those who do their homework.
What is the NFP report?
Released on a monthly basis by the US Bureau of Labour Statistics, the primary objective of the NFP report is to provide a snapshot of the number of jobs either gained or lost in the previous month. The report covers employment across most sectors of the US economy, excluding farm workers, private household employees, and non-profit organisation employees – hence the term 'non-farm'.
Alongside the payroll number, the employment report provides data on unemployment, average hourly earnings (often viewed as a key measure of wage inflation), and the participation rate, among other metrics.
The report matters not only because the US is the world's largest economy by nominal Gross Domestic Product (GDP), but also because it is on one side of the Federal Reserve’s (Fed) dual mandate. Consequently, from a trader’s perspective, the release of the employment situation report can directly shape market expectations for future rate changes and, by extension, move the financial markets.
While it is important to take into account the overall economic context, it is generally accepted that positive job growth bolsters economic output, which can eventually lead to higher prices (inflation), and this may push the Fed to raise rates to slow things down (known as a ‘hawkish bias’). The opposite is true for lower job growth, which could force the Fed to lower rates (‘dovish bias’) to stimulate economic growth and support the jobs market, as unemployment tends to rise when the economy does poorly.
US employment report: Looking under the hood
While I understand this is an article dedicated to trading NFP, you cannot trade this release without considering the other key components of the employment report; the NFP number is not the be-all and end-all.
Unemployment rate
The unemployment rate (U3) measures the percentage of people in the labour force who are unemployed. It is calculated by dividing the number of unemployed by the size of the labour force (the sum of employed and unemployed). In the US, you are considered unemployed only if you have actively sought employment in the last four weeks. This metric does not include ‘discouraged workers’ – there is a separate print for this in the report (U6), and this will always naturally carry a higher unemployment rate.
Rising unemployment can signal a weakening economy and reduced spending, while a low rate suggests strong economic output, with those looking for work often securing employment. Note that there will always be a percentage of people out of work due to what is known as ‘frictional’ and ‘structural’ unemployment.
Average hourly earnings
Closely tied to this is average hourly earnings, which measure the hourly pay for private-sector workers. As a key indicator of consumer purchasing power and labour costs, rising average hourly earnings show that companies are competing for talent, boosting disposable income but also signalling potential inflationary pressures. Falling wages, on the other hand, can signal economic trouble, usually pointing to a softening labour market or an outright recession.
Participation rate
Finally, the participation rate indicates the share of the labour force who are either employed or unemployed, calculated by dividing the labour force by the total working-age population. Do not confuse this with the unemployment rate, which only looks at active job seekers; the participation rate reveals the size of the active workforce relative to the population. A high participation rate indicates a motivated labour market, while a falling rate suggests the opposite.
Trading NFP data
Before I begin this segment, I want to stress this point: As traders, we trade the deviation between the report's outcome and the economists’ estimate – the median value. This means that we look for a data outcome that either comes in above or below this forecast and catches the market off guard.
There are primarily two ways to trade the NFP report: you either trade into the event or out of it. The core idea of trading into an event involves taking a position aligned with market expectations ahead of the report and often liquidating the trade just before or just after the report. I believe this is where ‘buy the rumour, sell the fact’ comes from. Conversely, trading out of a risk event means taking a position following the data release.
However, to trade NFP – or any release, for that matter – knowledge and preparation are key. I think the timeless proverb from Benjamin Franklin hits the nail on the head here: ‘If you fail to prepare, you prepare to fail’. And for me personally, preparation is the difference between success and failure in anything.
Step 1: Assess central bank expectations
The first port of call for professional traders is to assess central bank expectations, which you will quickly find are among the most important drivers of currencies. Is the Fed on hold, hiking, or lowering rates? What are the market expectations for the future rate path? You can find this information here using the CME Group’s FedWatch tool.
Step 2: Understand the labour market context
The next port of call is understanding the current situation in the labour market – is it strengthening or weakening? You will also want to assess how GDP and inflation trends are faring. While this has likely already been largely priced into central bank expectations, these three metrics can drastically shape policy expectations.
For example, if GDP is strong, inflation is rising, and the jobs market is trending higher, this would likely have prompted investors to raise their expectations that the Fed may increase rates, which, in itself, would have already boosted US yields and the USD. So, if subsequent jobs data come in stronger than expected, it could fuel expectations of further rate hikes and, consequently, USD upside.
Step 3: Check the consensus forecast and prior revisions
I would then check the consensus forecast on my economic calendar. Before the release, Bloomberg, Reuters, and major platforms all publish the market consensus – the median value of economists' estimates. I will also note the maximum and minimum estimates, as this helps me determine whether the data is a surprise.
So, if the median estimate is 100,000 new jobs, with a high (low) range of 130,000 (70,000), we know that results nearer these boundaries will likely be significant and can move markets violently. Also, review the prior revisions. Look at the trend in recent months; if the last two reports were revised significantly downward, a seemingly strong headline might be less impressive in context.
Step 4: Assess positioning data
Next, check positioning data – I track large speculative and retail positions in the weekly CFTC report (Commodity Futures Trading Commission). If the USD is overstretched to the downside – meaning traders are selling this market – for example, and the EUR is overbought (traders are buying), a broadly positive US jobs report could prompt traders to unwind their exposure, thereby opening the door to EUR/USD sell trades.
If you want to learn more about this, I put together a 3-part series that explains how to use positioning in your trading. The goal is to identify where traders are stretched; you then look to take advantage of any ‘squeeze’ if data go against this directional bias.
Step 5: Build your action plan
Once you have the above information, you can begin to generate a tradeable action plan: Decide what you will do under different scenarios before the number drops. Assuming you trade out of the NFP event, and taking the example above, 130,000 could be our trigger for an upside surprise (preferably alongside lower unemployment and higher wage growth) to buy USD. Conversely, 70,000 or below is perhaps our number to sell USD (if accompanied by higher unemployment and lower wages).
Step 6: Apply chart levels
Finally, once the trigger numbers are in place, you then turn to technical analysis (TA). What TA does is help you enter and exit the market. This will involve plotting support and resistance on your chosen markets and, depending on your trading strategy, may even include trading indicators, such as the Relative Strength Index.
This usually involves USD-based currency pairs – preferably those with opposite positioning biases. This typically includes the ‘majors’, such as EUR/USD, GBP/USD, AUD/USD, and USD/JPY. You may also find that some trade the US dollar index (called the ‘DXY’). Additional markets regularly traded include: US bonds, US stock indices, and commodities like gold and silver.
You generally have two options here if you choose to trade out of the event: either trade immediately after the report’s release, which will incur higher spreads, or wait for the dust to settle and trade according to your preferred chart structure. Once you become skilled, you can trade both, splitting your risk exposure between the two approaches. This is also where you need to understand risk management, utilising stop-loss orders and employing correct position-sizing techniques. This is important to understand, so it is worth spending time researching these areas.
Conclusion
The NFP report is one of the most powerful catalysts in financial markets, offering opportunities for informed, disciplined traders. Success in trading NFP comes not from predicting the number – you would be surprised that almost nobody does that consistently, not even the big commercial banks who have some of the sharpest minds in the industry – but from understanding how markets react to surprises, managing risk, and following a clear, pre-defined plan.
Approach each NFP release as a structured exercise in risk management rather than a lottery ticket. Over time, with experience and careful observation, you will develop an instinct for how the market behaves around the release and position yourself accordingly. That is when NFP stops being a source of anxiety and becomes one of your superior trading opportunities of the month. For traders looking to stay ahead of the curve, FP Markets provides daily market analysis, including in-depth previews of key economic events such as NFP.
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Written by FP Markets Chief Market Analyst, Aaron Hill
