Three lessons learned from the Non-Farm Payrolls trade – Trading Forensic

• Trading the Non-Farm Payrolls is a complicated – yet potentially lucrative – task.
• The "whisper" number had a significant impact on the trade.
• Having a stop-loss is critical for the event.

The first trading week of July 2019 can be divided into everything that happened before the Non-Farm Payrolls and after it. The USD dollar ended the week with substantial gains thanks to the jobs report – but the road there was not that straightforward. 

At FXStreet's Signals telegram group we have been active around the publication on July 5th. We begin by examining selected messages around the event and then move to the lessons learned.

How the trade played out

Around 90 minutes prior to the release, we wrote:

Should Microraptor enter a trade it will set the target at 60pip more or less, from the point of entry, which can suffer from slippage. This means we will report on the price levels where Microraptor has set the TP and SL, but we will also indicate where and if we would like to adjust trade parameters.

We can see that a clear target was set – 60 pips. No less importantly, clear take profit levels and stop-loss levels which served us well afterward.

Here is the following message on the group:

Another strong scenario in the opposite direction is a reading above 280k, enough to trigger demand for the US currency and push the EURUSD down (stock indices as well, and by sympathy commodity dollars).

280K was the target for a selling trigger on EUR/USD according to the headline. That was based on the original economists' consensus of an increase of 160K positions. We will see later how things have changed since that initial estimate, lowering the bar for an upside surprise in the gain in positions.

This was the message one hour before the release:

One word of caution: Microraptor can trigger conflicting trades since it will monitor the NFP Change and Wages. For wages we gathered these scenarios from our analysts:
above 3.3% -> EURUSD Down
below 3.1% -> EURUSD Up
 

We were aware of the complicated nature of trading the Non-Farm Payrolls report. There are two critical factors: the headline change in US jobs and the change in salaries. 

Let's fast-forward to the release and the signal that was triggered:

Only one trigger from Microraptor

US Average Hourly Earnings (YoY) -> Buy EURUSD

US Average Hourly Earnings (YoY) for June were slightly below than the average forecast (3.1% actual vs 3.2% expected)

that's bearish for the USD, therefore activating a Buy in EURUSD

Wages were weak and triggered a selling signals on the dollar – a buying one on EUR/USD. 

However, the change in positions came out at 224K, above official expectations at 160K but below the threshold for the trigger, stood at 280K:

the rest of the data released didn't show a significative deviation (with respect to past events) to trigger more orders

What happened in markets? The US dollar gained ground across the board – reacting to the headline 224K increase. However, the move took time to fully materialize. 

We wrote this at 12:45 GMT, 15 minutes after the publication:

The EURUSD long was aborted in our discretionally managed account for -2.1 pips. As explained before, our preferred scenario was EURUSD  down into the weekend with some possible follow through next week.

The stop-loss kicked in to abort the trade and minimize losses. Moreover, we foresaw the extension of the downtrend in EUR/USD. The world's most-popular currency pair closed the week at 1.1224 after trading close to 1.1300 ahead of the NFP.

Here are the three lessons we can learn:

NFP is complicated

There are reasons why the "king of forex indicators" has earned its throne. While volatility is high, it is essential to follow both the headline number and wages for the full impact. Each US jobs report requires a careful study even for experienced traders. 

The reward for successfully trading the event may be immense – beating that of operating around a more straightforward economic indicator. In this case, the market reaction to the publication was slow – allowing time for a full analysis and jumping onto the trade with a calm mind.

Leading indicators changed expectations

As mentioned earlier, the number of positions was originally expected to rise by 160K. However, economic figures leading up to the NFP were downbeat. Two days before the NFP, we wrote this article: NFP leading indicators: Negative signs outweigh the positives.

And while these figures did not foresee the actual result – they shaped market expectations. The "whisper number" stood at only 120K – 104K below the result. There is a considerable difference between a surprise of 104K and a surprise of 64K – the gap between the 224K print and the original estimate of 160K – and that explains the full market impact.

Stop loss is critical

"Cut your losses early and let your profits run." That is one of the basic tips that forex instructors teach – and it is as relevant as ever. In this trade, we cut short our losses and aborted the trade almost unharmed by shedding a meager 2.1 pips. One significant winning trade can wipe out losses from many such losing ones. 

We set out an exit strategy – including both stop loss and take profit points – and that is something every forex trader should do.

Conclusion

Trading the US Non-Farm Payrolls may be rewarding but requires considerable preparation. Leading indicators should be watched closely and an exit plan is needed – as ever.