Trading the NFP
Trading the NFP days is one of the trickiest things to do, as such an economic release comes usually with at least one fake move. First of all, let’s try to explain what the NFP is.
The term comes from the Non-Farm Payrolls release in the United States and it is always accompanied by the unemployment rate. It is important to note that the whole world is looking at the shape of the US economy, as they are the biggest single economy, and what is happening there clearly affects the whole global economy.
Labor Data and Fed’s Dual Mandate
In trading, it all comes to the central banks and their monetary policy. Well, the Federal Reserve has a dual mandate, and this means there are two things these guys are looking at when deciding what to do with the interest rate or when establishing monetary policy: one is the inflation level, like any other central bank in the world, and the other one is to create jobs. So actually their job is to stimulate the economy to create jobs and the economic policy/monetary policy will be set based on that.
The NFP is released on the first Friday of each month and there is a saying that the first swing price when the NFP is released is a fake one. Well, I don’t know if that is necessarily true, but try to trade binary options with end of day expiration date on the NFP release as volatility levels are quite high and markets are moving aggressively. So short term binary options are not necessarily the wisest idea, even though price moves fast on nothing at all.
NFP Releases Cause Volatility
Because the Federal Reserve has a dual mandate, the NFP is probably the most important economic release that makes markets move strongly. The mandate of the Federal Reserve is to keep inflation below or close to two percent and to create jobs. This second attribute makes the job related economic releases a top priority interest for traders. Therefore, traders are trying to get as many clues as possible regarding the potential NFP numbers by looking at other economic releases that may hint to the NFP outcome. Such releases are:
- ADP (private payrolls numbers). The ADP is released on the same week as the NFP, but on a Wednesday, basically giving clues about the NFP two days earlier. While the ADP is hardly an NFP direct correlated indicator, it gives clues about the state of the US economy and therefore, for example after a strong ADP release, chances are that the NFP will beat expectations as well, so trading call options let’s say for the USD/JPY is one way to go.
- Another release is the Initial Jobless Claims/Continuing Claims. These claims are released on a weekly basis, on a Thursday, and show the change in the number of those that are applying for unemployment benefits and the ones that are still requesting those benefits. It is said that the claims are lagging numbers but nevertheless looking at a trend two- three months old, helps one have an idea about the NFP number.
- Last but not least, there are some releases that refer to the state of the US economy and have an employment component included. Such a release is the ISM (Institute for Supply Management) and the employment component in there offers a rare view in the potential NFP number to be released. The unfortunate part is that ISM is sometimes released after the NFP so in some months this vital piece of information is not useful as it is offering info after the fact.
Because the Federal Reserve sets the monetary policy and interest rates based on the jobs numbers too, then a strong NFP number implies a strong US economy and therefore an expansionary monetary policy should follow if the pace of NFP releases gets better and better. Buying call options on the US dollar on dips between NFP releases is indicated and trying to pick end of month expiration dates or one month expiries should be more profitable than trading on the short-term horizon. After all, interpreting the state of an economy and trying to take a trade based on the info obtained is the very essence of trading, only that this is called fundamental analysis.
Technical vs Fundamental
Technical analysis, on the other hand implies making a forecast on the right side of the chart based on the info on the left side of the chart. However, both fundamental and technical analysis are important for different trading styles. Some are focusing more on the economic outlook and try to have an idea about the changes that are taking place at the macroeconomic level, while others are looking at technical indicators and take a trading decision based on them.
Regardless of your preference, they are crucial so make sure you’re taking them into consideration for binary options trading to be successful.