As the saying goes ‘there is more than one way to skin a cat’ and this is true for trading where there is more than one way to make a living. While some traders rely on fundamental analysis and others on their technical skills, some are able to make a good living trading news events and economic releases alone.
For the news trader, there is possibly no more important number than the Non-Farm Payrolls report which is released on the first Friday of each month. It is this number that paints the clearest picture of the current state of the US economy and although unemployment can sometime be a lagging indicator NFP is often a key consideration when central banks decide on their monetary policies. In fact, the Federal Reserve has recently stated that its current mandate is to reduce levels of quantitative easing only when unemployment has dropped below the 6.5% mark.
Interpreting the number
The non farm payrolls number is always released at 1.30pm GMT on the first Friday of the month and is released alongside the underlying unemployment level. To interpret the number is straightforward. The headline number of payrolls indicates the number of jobs added in the US economy minus agricultural jobs and the underlying rate simply explains the total percentage of the population considered unemployed.
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Trading the number
The most obvious way to trade the release would be to buy stocks when payrolls come in lower than expected and sell when payrolls come in higher than expected, since more unemployment indicates a weakening economy and vice versa.
However, markets are never so predictable and there are a lot of different factors that affect how the market will react to the release. It all depends on market sentiment and what traders are expecting. Lately, for example, markets have been rallying off of a poor NFP number since a poor figure intensifies pressure on the Federal Reserve to increase its quantitative easing.
The ‘Approach’ strategy
To overcome this problem, some traders use what is known as an ‘Approach’ strategy, where they form an opinion on market sentiment and place a trade in the predicted direction as the news release approaches.
It is possible to judge sentiment successfully by looking at recent news releases. If the market responds positively to a good number, then market sentiment is bullish but if the market does not respond much to a good number, this is a sign that market sentiment is bearish.
If done successfully, the trader can judge the right way and will have a small profit before the news release comes out. He can then move his stop up to break even and limit his losses. Then, when the report comes out and the market moves, the trade will either be stopped out for no loss or be in a decent sized profit. Effectively, a free trade.
A good example of this occurred many times during the financial crisis when the market was forever in fear of a bad payrolls number. Such a number could cause stocks to plummet and because of this no one would carry a long position going into the number. Stocks would nearly always begin to slide, just an hour or two before the release. Then when the figure came out, the market would often spike down sharply giving huge profits.
Shorting or buying the market a couple of hours before the release then bringing down a stop loss to lock in profits is an excellent strategy for NFP’s and works on other big news releases too.
Further reading: 5 Notes for Non-Farm Payrolls Trading
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