The nonfarm payroll data has been the economic indicator that move the forex market the most in the short run (see post “What Moves Forex Market – Fundamental Analysis” ). A short run trading strategy can be run before and after the release of this economic data. The indicator was published monthly by Bureau of Labor Statistics, U.S. Department of Labor. The Release Time is First Friday of the month at 8:30 ET for prior month (Web site: http://stats.bls.gov/news.release/empsit.toc.htm).
Trade news releases can be centered around 2 approaches – proactive vs. reactive trading based on the idea that when an economic number deviates significantly from the consensus forecast (come out unexpected as a surprise). Proactive trading with news release require to place a trade before the economic release while the reactive trading place the trade after the news release . A combination of both approaches can be adopted.
For proactive approach, trade should be placed 20 min before the data is released; regular stop loss should be set before entering the trade. A general rule of thumb is to place stop loss at the range low (for long position) or range high (for short position) for past 2 hours. Profit target should be at least the amount risked. Usually half of the position should be exited upon hitting the first profit target. The remaining position should be trail stopped upon hitting the 20 period simple moving average (SMA) on a 5 min chart or set a hard stop of three times risk. The biggest problem with proactive trading is the difficulty of predicting economic data. It may be beneficial to subscribe to some professional forex trading program and/or service unless the trader have a strong background in economics or years of experience trading forex fundamentally.
Although reactive trading approach does not have this problem, it has its own disadvantages. Usually, the stop has to be much larger which may be difficult for risk averse traders. A general guideline is to only trade an economic data release if the surprise is larger than 100% of the market’s forecast. Trades need to be placed 5 min after the number is released. This is to make sure there are no immediate retracements. Stop can be set at low (long position) or high (short position) of the news candle. First profit target for half of the position is the amount risked. Trailing stop is then set for the remaining half of the position when hitting 20 period simple moving average (SMA) or set a hard stop of three times risk.
Because proactive and reactive trading are both have their disadvantages, the best way is to to combine them in a trade. This can be done by initiating half of the position ahead of number and another half after the data is released. Although some of the potential profit may have to be given up if the guesswork is not correct, the risk is also much less than the pure reactive approach.
Sometimes, other economic data released can help in predicting the number to be released. In the case of nonfarm payroll data, the PMI report’s employment component and ADP report may provide insights in forecasting nonfarm payroll number. PMI measures how well the manufacturing sector is doing. This index include five major components: new orders, inventory levels, production, supplier deliveries, and employment. The indicator is released by: Institute for Supply Management (ISM) the first business day of the month, 10:00 am EST.
The ADP National Employment report is published monthly by ADP or Automatic Data Processing Inc. The ADP report provides a snapshot of the non-farm labor market and the number of newly employed workers in the past month based on real payrolls data processed by the company. It is released on the Wednesday of the same week that Non-Farm Payrolls (NFPs) is released – 2 days after ADP. Given the similarity between the 2 sets of data, statistical analysis of the past data has suggested that the ADP report can be used as an early gauge of how the NFP report will come out.
Finally, Kathy Lien’s a book “Day Trading and Swing Trading the Currency Market” has many examples and advice about how to trade news releases which may be valuable for potential traders.