Non-Farm Employment Change and Its Impact on the Forex Market
&8220;Non-Farm Employment Change&8221; is one of the most important news that is able to move the forex market strongly. It has a strong impact on the USD currency pairs. There are so many other news ranked as the important news for forex trading and currency market, but they are not that important in most cases, or even if they are, they are not strong enough to make the markets move reasonably.
Before explaining about the &8220;Non-Farm Employment Change&8221;, first we have to explain about another news which is highly related to &8220;Non-Farm Employment Change&8221;. It is the &8220;ADP Non-Farm Employment Change&8221;.
By definition, &8220;ADP Non-Farm Employment Change&8221; is the estimated change in the number of the employed people in USA, during the previous month, excluding the farming industry and government.
ADP Non-Farm Employment Change is not the actual change in the number of employed people. It is the estimated change. It also doesn&8217;t consider the farming industry and government employments. ADP Non-Farm Employment Change becomes released every month, usually one or two days before the Non-Farm Employment Change gets released. As it is just the estimated change, it doesn&8217;t have any strong impact on the currency market, because traders (the markets main participants) don&8217;t take any positions based on the estimated number, and they prefer to wait for the actual and real numbers and statistics.
However, as &8220;ADP Non-Farm Employment Change&8221; becomes released 1-2 days before Non-Farm Employment Change, it usually helps us have a foresight about Non-Farm Employment Change, because Non-Farm Employment Change is almost the same as ADP Non-Farm Employment Change, but with some differences:
1) Unlike ADP Non-Farm Employment Change which is the estimated change in the number of employed people in USA, the &8220;Non-Farm Employment Change&8221; is the actual change in the number of employed people in USA. And this is the first important difference between these two news. &8220;Non-Farm Employment Change&8221; can move the market very strongly, because it is the actual and real change in the number of employed people.
2) The second difference is that, in Non-Farm Employment Change, only the farming industry is excluded, and so, it even covers the governmental employments which is very important for the economy of a country like USA.
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What Is &8220;Non-Farm Employment Change&8221; Exactly?
Non-Farm Employment Change is the actual change in the number of employed people in USA, during the previous month, including the governmental employments, but excluding the farming industry. That is why it is a strong and important news and it shows a very strong impact on the currency market.
ADP Non-Farm Employment Change which is usually released 1-2 days before Non-Farm Employment Change, has almost no visible impact on the currency market, but as it is highly related and correlated to ADP Non-Farm Employment Change, it helps us get ready for the big movement that the forex market will have when &8220;Non-Farm Employment Change&8221; is released.
Why Is &8220;Non-Farm Employment Change&8221; an Important News for Forex Traders?
Why Is It Able to Make the Forex Market Move Strongly?
&8221;Non-Farm Employment Change&8221; is important for forex traders, because it makes the market move, and so, forex traders can take the advantage of the movement and make some money.
This news is able to move the forex market, because it is the most important and actual news related to USA employment. Employment is a very important factor reflecting the situation of the economy of a country. When the number of employed people in a country goes up, it means the economy and industries are doing good and people get hired by the government and private companies. It means the economy will grow and the country will have a good future. Therefore, people of such a country, as well as the people of the other countries, will show more tendency to invest in the country, because they believe their investments will be ended to profit. To invest in this country, they will have to buy the currency of the country against the other currencies, and so, the value of the currency of the country will go up, because any commodity which is bought more against the other commodities, will become more expensive. &8220;Buying more&8221; means a higher demand, and a higher demand will make the price go up.
When the number of employed people in a country goes down, people of that country and also the other countries, will show less tendency to invest in the country, and those who have already invested, will get out of the markets. For example if they have bought properties in that country, they will think that as the economy of the country is not doing good anymore, the price of their properties will go down and they will lose money. Therefore, they will sell their properties and take their money out of that country. Many of them will sell the money against the other currencies because they want to invest their money in the other countries that are doing good. Selling a commodity against the other commodities will cause the price of that commodity to go down. Therefore, if the employment of a country goes down, usually the value of its currency will go down too.
Employment change and the value of the currency are like the edges of a double-edged sword for the developed and industrial countries like USA, Japan and Germany, and also countries that their economy is dependent on tourism. Although their governments try to improve their economy, decrease the unemployment and increase the employment, they do not like the value of their currencies to go up against the other currencies. For the developed and industrial countries like USA, if the value of their currency goes up and becomes too expensive against the other countries&8217; currencies, the amount of the orders they receive from the other countries will go down too, because many of the counties can not afford to buy the products in a currency which is a lot more expensive than their own currency. For example, if Japanese Yen becomes too expensive against USD, Americans will have less tendency to buy Japanese products like Japanese cars.
It is the same with the tourism countries. If the value of their currency goes up, people of the other countries will not be able to buy it against their own currencies to travel to that country, and so, they will have a lower number of tourists visiting their country.
Therefore, at the same time that the governments of the developed and industrial and also tourist countries have to improve the economy and employment, they have to keep the value of their currencies at a reasonable level.
Let&8217;s get back to &8221;Non-Farm Employment Change&8221; and the USA economy.
How to Trade Using the &8220;Non-Farm Employment Change&8221;?
If &8221;Non-Farm Employment Change&8221; goes up, the USD value will go up against the other currencies. It means forex traders can buy USD against the other currencies, or sell the other currencies against USD. At the moment of &8221;Non-Farm Employment Change&8221; release, if its actual value is reasonably higher than the previous month, you can buy long with USD/CHF or sell short with EUR/USD, or GBP/USD. In contrast, if its actual value is reasonably lower than the previous month, the USD value will go down, and you can sell short with USD/CHF, or buy long with EUR/USD, or GBP/USD. But, it is not usually that easy.
Whenever the Non-Farm Employment Change wants to be released, we already know the previous month value. Additionally, the economists always give a forecast for the expecting news. The released news can make the market move, only when it is reasonably higher or lower than the previous month and the forecast value, otherwise it will have no or a very low impact.
For example, when the previous value is 50,000 and the forecast is 150,000, it means the economists think that the economy has been doing good during the last month and the employment has gone up. Under such a condition, if the Non-Farm Employment Change becomes released, and its actual value confirms that the economists have been right, for example it becomes 145,000, or 155,000 or values like that, then the USD value will go up dramatically. If it becomes released much lower than the forecast value, then it may not have a strong impact.
Let&8217;s take a look at an example that happened on Friday, June 1st, 2012.
On June 1st, 2012, we were waiting for the Non-Farm Employment Change release at 8:30 EST (usually this is the time that this news becomes released), while the previous month&8217;s value was 77,000 and the market expected the new value to be around 151,000 which was a lot greater and meant that the economists thought that the US economy has been doing good during the previous month. Therefore, if the actual value was released around the expected value (151,000), it would cause the value of USD to go up strongly. And, if it was released around the previous value (77,000), it would cause the value of USD to go down strongly, because the actual news value would be strongly against the expected value and would be much lower than what people hoped. It means while people were waiting to buy USD against the other currencies because they expected that its value would go up (based on what the economists had predicted), the news was released totally in the opposite direction, and so, people suddenly decided to sell USD against the other currencies.
What if the actual value was something in between, for example, around 100,000? Then it would make the value of USD to go down too, but not very strongly. It would be possible that it would make the market just noisy and no strong direction would be taken by the market.
In general, &8220;Non-Farm Employment Change&8221; or the other strong news can make the market move strongly only when the actual value is much greater or smaller than the expected or previous value.
Now let&8217;s see what happened in reality.
While the previous value was 77,000 and the forecast was 151,000, the actual value was released at 69,000 on June 1st, 2012. Therefore, the USD value went down strongly, and so, EUR/USD and GBP/USD went up. At the moment of the news release, EUR/USD&8217;s price went down for about 35 pips and then went up again, formed a strong buy signal on the 5min charts, and then went down and up again for three candlesticks to test the support level, and finally went up for over 170 pips in about 50 minutes which was the strong movement that was expected from the actual value of the news that was released. That was a really nice and strong up movement that could easily be traded:
How Could You Take a Proper Position After the News Release?
Usually before the important news release like &8220;Non-Farm Employment Change&8221;, and while the market expects some big changes like what we had on June 1st, 2012, the market becomes so slow and we will have a relatively tight range which can be visible on the shorter times frames like 5min or 1min. The easiest way to take a position right after the news release is setting buy and sell pending orders several pips above and below the range. However, you should notice that the market fluctuations after the new release (like what we had in the first 20 minutes after the &8220;Non-Farm Employment Change&8221; release on June 1st, 2012), can trigger both of the buy and sell pending orders. Therefore, having a proper stop loss is a must. You should set the buy order stop loss several pips below the range support level (which is where the sell pending order is), and the sell order stop loss several pips above the range resistance (which is where the buy pending order is). You should also expect that sometimes both of the orders&8217; stop losses may be triggered. In this case, you can wait a little until the market breaks out of the support or resistance visibly and then take the proper position again.
You should also note that sometimes when the market starts moving very strongly after the news release, the broker is not able to execute the pending orders exactly at the level they are set, and the orders can be executed far above/below that. You should also be careful about the market maker brokers that freeze their platforms during the news release to prevent their clients to make any profit.
These are all the facts that you have to consider if you want to trade the news. In general, although using the pending orders is the easiest way to trade the news, it can be risky too and it doesn&8217;t work most of the time.
A safer and more professional way is that you do not set any pending order, and wait for the market to show you a trade setup based on the technical analysis, after the news release. Again, the &8220;Non-Farm Employment Change&8221; release on June 1st, 2012, is a good example. As you can see on the below screenshot, you could easily take a long position and make over 100 pips when the market broke above the resistance line about 30 minutes after the news release:
You could take a long position right after the close of the candlestick that broke (closed) above the resistance line. You could set the stop loss several pips below the open price of the same candlestick:
This was how day traders try to trade the news at the news release time.
However, it is risky most of the time and is not practical in reality. The best way to trade such strong economic news is waiting for them to form a strong trade setup on the longer time frames like daily, weekly and monthly. The impacts that the news like Non-Farm Employment Change place on the markets, is not just limited to the shorter time frames and the same day that the news is released. They have a long term impact that sometimes lasts for several months or even a few years or even more.
Now, let&8217;s take a look at the USD/CHF price chart, and see how it moved when the news was released on the same day and at the same time (June 1st, 2012, at 8:30am EST). As you can see on the below screenshot, the USD/CHF market moved exactly like the EUR/USD market, but from the other direction. Therefore, if you wanted to trade USD/CHF, you could take a short position after the support breakout:
How We Trade the News &8220;Non-Farm Employment Change&8221;
We trade the longer time frames. The impacts of the strong news like Non-Farm Employment Change will also be reflected on the longer time frames. By the time they form a trade setup on the daily, weekly and monthly time frames, the dust is settled, the market is calm, and the liquidity and spread is back to normal, so that you can trade the news with peace of mind while you are not afraid of the problems like price slippage and the dramatically high spread. You don&8217;t even have to be at the computer at the time of the news release. This is how the professionals trade the strong news like Non-Farm Employment Change.