The Forex Market Explained: How To Trade Forex With Non Farm Payrolls
“A really common mistake that most amateur traders make when it comes to trading the NFP release… they focus all their attention on the numbers themselves”
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In this video we’re going to explain why making money from the Non-Farm Payroll report has nothing to do with the calendar release itself!
If you trade currencies then it’s almost certain that you’ve heard of the famous Non-Farm Payroll report or NFP for short.
This is an employment figure that is released monthly in the United States.
The reason it’s so famous is because, in general, professional traders watch this report more closely than any other.
It gives them clues about the health of the US labour market. They then use those clues to speculate on whether or not the Federal Reserve Bank will increase or decrease their interest rates. This speculation causes some crazy price moves. It’s only natural that retail traders see all this going on, and want a piece of the action.
However, there is a really common mistake that most amateur traders make when it comes to trading the NFP release…. and this also applies to any other data release.
The mistake they make is to focus all their attention on the numbers themselves.
You see, every data point on an economic calendar comes with something called a forecast reading. This is essentially a prediction, from traders, economists and market experts of how they think the next data point will print. From these predictions, a median forecast number is derived, and this becomes the basis for the market’s expectations.
The general idea from here is that if the actual number comes out and is different from the forecasted number, the price will move accordingly.
So, for example, if the actual comes out much better than the forecast, the currency is expected to rally. If it’s weaker, then the currency should fall.
So, most retail traders watch the calendar carefully and when the data comes out, they trade in line with those general principles.
The problem is that most times, it simply doesn’t work. And this isn’t because news is unpredictable or dangerous.
It’s because those traders are missing one crucial secret ingredient….
That ingredient is something called sentiment. Sentiment is basically just the mood of the market at any given time.
You might have heard on the news about ‘market panics’ or a ‘bullish market’. These emotions are very real and the market is constantly switching moods on a daily basis. If you want to make money with the NFP numbers, you need to first, understand what mood the market is in.
This will dictate how they are likely to react to any data point that is released.
For example, imagine if NFP comes out better than the forecast, but the market is in a really depressed mood on the US economy, because all the other data has been terrible and the Fed look like they’re going to cut rates no matter what…
In this type of scenario, a positive NFP would be drown out by the over-riding negativity. It’s very likely that the market will react to that positive number by actually selling the currency!
Their rationale would be something along the lines of, the Fed will still cut and the economy is still headed towards recession.
Those bigger picture worries, trump any short-term positivity in the actual number.
However, if, in that scenario, the actual number provided a big negative deviation, then this will very likely cause a much bigger than expected sell off on the Dollar.
The reason is that this would feed right into those market fears…. traders are already negative, so it isn’t going to take much bad news to get those sell offs going again.
So, the next time you’re thinking of trading NFP, remember to find out what the current sentiment is around the USD.
And then only jump into the market, if there is a significant deviation in line with that prevailing mood of the markets.
That’s the secret to making money from NFP and all other major data points on the economic calendar.
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