Why Trading The NFP is WRONG
US Non-farm payroll is not what Forex traders are promised
The non-farm payroll (NFP) employment data is a misinterpreted economic report used by many educators, brokers and traders who think you should be trading it. When in fact it is the opposite.
Non-farm payroll data is compiled employment data from goods, construction and manufacturing companies in the US. It doe not include employment data from farm workers, private households and non-profit organisations. Overall, it is used as an economic indicator for the labour market in the US, which is why you may see it as having a high impact on economic calendars.
In brief, the NFP compares the previous month employment with the released month and the number represents the number of jobs which are added or lost in the economy. Increases in employment means businesses are hiring more people, they're becoming more profitable and these people have money to spend on goods in the economy. All these factors increasing the demand for the US dollar. The opposite of this is when the NFP decreases.
What happens when there is more employment? Companies that do not reside in the US must purchase US dollars to pay their employees. As the economy grows from increased spending the country is seen as a safe environment where investors are more willing to move money also increasing the demand of the US dollar.
Why traders should not trade the NFP release
The NFP can create huge market volatility, this can be good and bad for traders that are in long term positions. Traders that are in short term positions the data can be deadly.
Just because the data can create volatility doesn't mean it should be traded. When a typical Forex trader wants to trade the NFP they will be over-leveraged and risk too much of their equity. The trader has no clue on what the outcome of the NFP will be and what impact it will have on the US dollar. If the position goes in your favour you feel happy you made some money. If the position goes against you, it heavily dents your account especially if you are day trading and you come across slippage where your stop loss is not triggered at the price you set. If you didn't set a stop loss, you may go bust.
What trading on news does satisfy, is the natural human tendency to gamble. This is the feeling that many educators and brokers prey on, don't be fooled. All they are doing is trying to increase the commissions you pay to them and enter trades more frequently. Don't speculate your money away, invest it with thorough analysis.
"Trading on news is gambling whether you like it or not."
How traders should trade with news
Forex traders should use economic data in their analysis. If you are not there is a very high chance you will not be profitable. Why would you leave out a major component in your analysis? The major drivers of currencies is how well an economy performs, to see and forecast how well an economy performs you use and analyse economic data. You don't trade it.
What Forex traders should do is aggregate suitable economic data together to get a good understanding on where the economy is headed. Are the pieces of news signalling growth in the economy or a weakness. The Logic Strategy compiles over 500 pieces of economic news through artificial intelligence and machine learning algorithms to come up with a solid conclusion on which way an economy is headed. Similar technology is used in Investment banks, hedge funds and pension funds.
What to remember:
Don't trade on the news when it's released
Use the data as part of your overall analysis to see whether the whole economy is growing
Fast track the process with the Logic Strategy
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