The strategy for trading nonfarm payrolls is a fairly simply but effective strategy, which allows traders to make a profit of 100-150 pips in a matter of several trading hours (for four-digit quotes). However, it does require some trading skills; those will be discussed below. I recommend that you review them carefully, as trading the news is risky business and ignoring the rules of prudent trading can lead to losses.
Nonfarm payrolls is an extremely important economic indicator in the US. This report is released at 08:30 EST on the first Friday of the month. Its release usually triggers a strong reaction on the forex market, which creates an opportunity to make money for the savvy trader.
As a rule, very few traders place orders before the report is released. During this time, the forex market is often characterized by false breakouts or movements in a tight band (typically, 30-70 pips). Opportunities to trade successfully arise when the report actually comes out.
The gist of the strategy is as follows:
1. It is necessary to place pending orders on the MT4 terminal approximately 5-10 minutes before the report is released. As the numbers, not to mention the market reaction, are difficult to predict, the trader needs to place the pending orders in two opposing directions (i.e., both buy and sell orders).
2. If you have open orders before the release of the report, it is best to close them because, even if you have placed a stop-loss order close to the price to hedge yourself, the market might open against your position with a gap, which might cause your stop-loss order to be closed at the market price (i.e., at the price at which the gap is opened) and not that of the stop-loss once the report is released. This might translate into a difference of 20-70 pips – a difference that might lead to a loss of your deposit.
To be sure, if the market opens on your side, you stand to make a good deal of money. This boils down to a 50-50 chance. It is up to you, though, whether you want to take that risk.
Typically, once the report comes out, the market tends to move in one direction, following which there is usually a strong reversal and a move in the opposite direction.
Therefore, to avoid an undesirable execution of your pending orders, it is advisable to place them about 35 pips away from the price level before the report is released (see Fig. 1).
Buy Stop Order (current price + 35 pips)
Time: 08:25 EST
The orders have to be at least 50 pips away from each other
Sell Stop Order (current price - 35 pips)
Figure 1. Placing pending orders before nonfarm payrolls is released
3. The pending orders are placed. You now need to think about your stop-loss orders, which should be placed at a distance of 20-30 pips from the entry point into the market. Be sure to place the stop-loss orders at the same time that you place the pending order for the breakthrough – this is important in case your data center loses the connection or the price starts to behave unpredictably before or after the release.
For that purpose, we recommend the 1-point Trailing Stop (an MT4 advisor), which is ideal in this kind of situation. You can get it for free by subscribing to the Top 50 Forex Strategies website. The advisor has all the necessary functionalities for trading the news and has never let me down during my own trading activity.
How the trailing stop works
4. With respect to take-profits, I usually set them 70-100 pips from the entry point into the market.
Once the report comes out (08:30-08:31 EST), the price on the forex market will sharply move up or down.
Most likely, one of the pending orders placed above will be opened. If you see that you’ve made a profit greater than 25-30 pips, you have to move the stop-loss order into breakeven territory and cancel the second order (a trailing stop order will be of great help here, as it places instructions to move orders much faster than a human does).
You now have three choices:
- You can trail your order at a safe distance of 10-25 pips. The exact number depends on the currency pair you’ve selected and on market volatility – the higher the volatility, the smaller the size of the trailing stop and its movements.
- You can take a wait-and-see approach and monitor the price and how it reacts (in this case, it is essential to have already moved the order to breakeven).
- You can take part of the profit off the table (say, 50%) and leave the rest on the market.
5. About 20-25 minutes after the nonfarm payrolls report is released, it is necessary to determine the direction of the forex market.
If you haven’t taken your profits yet, this is the time to do it (08:45-09:05).
If one of the orders was opened and the price has been in limbo (it is said to be in limbo when there’s a movement in a 15-pip price band, but the price isn’t moving further), you would do well to close the position and take your profits, as a market reversal is in the cards.
A price that is in limbo is a telltale sign of a shift in trader sentiment.
See Figure 2.
The limbo period
Profits are taken
Getting ready to continue trading (08:45-09:05)
We have made a profit on the first order. We now need to determine how to proceed with our trading.
There are two options:
- Trade in the direction of the successful first order.
- Wait and monitor the price to see its direction and then follow it.
We work the orders the same way, by placing them in two opposite directions.
As soon as the order is closed, we place two pending orders: the first pending order is placed in the direction of the last closed trade (the breakthrough order has to be at a distance of 10 pips greater (lower) of the maximum (minimum) high (low) of the price after the nonfarm payrolls report (see Figure 3), while the second order should be placed based on the “50% principle”, i.e. 5 pips – in other words, if the market price crosses more than 50% of the rise (fall), it is highly probable that the price will return to the direction it took before the report was released. Figure 3:
Figure 3: Getting ready to continue trading
Buy stop (nonfarm payrolls high + 10 pips)
Your second trade (08:50-09:10)
After you have reentered the market with one of the pending orders you’ve placed, you can cancel the other one. It is just as necessary to move your stop-loss to breakeven in order to eliminate the risk of possible losses.
So, if you had an open pending order in the direction of the first open order, that is the direction of the price movement and is likely to last at least another 70-150 pips.
After the second market entry and the placing of the order, you might encounter another price limbo on the market (09:10-09:50).
Usually, a second price limbo recurrence is most likely to arise at the point of the first movement after the report release. Consequently, if you see a second limbo recurrence within 10-15 minutes, take your profits as quickly as possible.
The last entry into the market to trade the nonfarm payrolls reports (09:50-10:10) is possible at the breakthrough point of the market limbo.
It is unadvisable to open an order in the opposite direction because, if the market price returns to the first half of the swing after the news release, the market is indicating that neither bulls nor bears dominate the market, which will make it hard to move the price in the direction of least resistance at this time.
Pending orders are placed according to the same idea: the high or low +/- 10 pips (see Figure 4):
Figure 4: The final entry into the market
Your last opportunity to take profits is between 10:50 and 11:30 EST.
However, in my view, the ideal way to trade is use a 10-15-pip trailing stop and close the position with a stop-trade order (which is a positive stop-loss order).
You can consider your nonfarm payrolls trading strategy to have been successful if the cumulative profits from all of your nonfarm payrolls orders are 100-120 pips. However, there are times when the forex market gives you the opportunity to make a profit in excess of 150 pips. Be sure to take advantage of such an opportunity!
The best software for news trading is FIX API Trader. You can learn more about fix api trader here...
If you are not ready for decribed strategies, you can use Latency arbitrage with news add-on for NFP and other news trading as well. You can learn more about Latency Arbitrage here...