Forex: Trading Non-Farm Payrolls is Easi(er)
February 5th, 2007 by Justin
There are new companies launched every day in the forex world. Well nigh on half of them are selling products that involve getting rich quick by trading news. Trouble is, few execution services are good enough for people to consistently make money trading news. This is the case even in the world of currency trading, where brokers and salesmen tout the amazing liquidity of the market left and right.
If your idea of a news trading strategy is to
1. Beat others to getting the news release.
2. Beat others to interpreting the news release.
3. Beat others to getting in the market.
4. Enter the market immediately following a major news release.
….or do all of the above, then you’re hopeless. Have at it, but most likely you’ll end up
1. Overpaying for your news feed (professional feeds run over $1000 / month)
2. Pissed off at your broker for poor execution, slippage, and the like.
3. Chasing the market…trying to get in after the move has already happened.
4. Misstepping as you place a trade before fully understanding the number.
I have a better idea:
Get into the market after the major move has been made. And get in when your chances of seeing a reversal are high. This allows you to get your price, rather than chasing and being slipped while executing during low liquidity. It also improves your reward/risk ratio tremendously, because you can enter where you want to rather than with total uncertainty, as when the market is ripping. Lastly, but perhaps most importantly, you can execute this strategy calmly, and keep your stress levels down. Stress–particularly the kind that is directly caused by trading itself–can ruin the best of trading plans. Short-term, jittery trading is not meant for everyone, and leads to overtrading generally unless you have tremendous control and patience. This strategy will keep you from being one of the fools who causes massive spikes and reversals, and instead allow you to take the time to set up your trade carefully and sensibly.
Read this, from www.dailyfx.com, a major FX news site for retail clients:
Over the past year, the US non-farm payrolls report has become incredibly difficult to trade. Large revisions are made frequently which is reducing the accuracy and reliability of each individual report. This is exactly what happened this morning when traders first took the US dollar lower on the disappointing headline release but quickly erased those losses when they saw the massive revisions for the prior months. More specifically even though payrolls increased by only 111k in December compared to the market’s 150k forecast, the number of additional jobs added back to the November and December payrolls totaled 81k, washing out the 39k shortfall. The massive revision was for the year ending in March 2006 where we actually saw payrolls increase by 754k, the largest revision on record.
The view that trading NFPs is harder than ever is misleading. Twice in recent history–December 8th 2006 and last Friday–non-farm payrolls have come in below expectations on the headline number, and the USD (US Dollar) has plunged. Within an hour, though, the market has reversed, and the dollar has gained and followed through, gaining over 100 pips.
What do the two dates have in common? And why did the dollar gain when the news was dollar bearish? Because of the massive revisions that make NFPs so confusing to begin with. Last Friday, the headline number came in below expectations, but previous months were revised upward, and an entire year was revised by several hundred thousand jobs. Yet speculative traders were out in enough force to drive the USD down, and the EUR, GBP, AUD, and JPY up, by 50 pips on average.
In the case of complex numbers such as NFPs, and those prone to large revisions in particular, time is better spent analyzing the number after it comes out–even if your news feed is free and delayed by 15 minutes–waiting, and pouncing on a reversal.
Just remember, reversals are more likely when the revisions are large and are in the opposite direction of the headline number.
