What is Non-farm Payroll (NFP)?

Forex market analysis is like a three-legged table. Refuse to accept this and you’ll fail. Like it or not. There is the technical analysis, fundamental and sentimental analyses. In this post, I am not going to talk about any of them in detail but instead, I am going to hit on one particular factor that influences the forex market a great deal. Technical analysis is everywhere. Almost all beginner traders have at one point in time read an article or two about it, or even gone through all pages of a whole book to learn technical analysis. I wouldn’t be surprised. Technical analysis has become ubiquitous and most of the time people even forget that fundamental and sentimental analysis exist! And this explains why most traders lose at the game. You just can’t win a game knowing only 33.3% of the rules.

Blending in a bit of fundamental and sentimental analyses is essential to making sustainable and constant profits, especially considering the fact that forex is designed to make us lose! Yes, I said it. And it’s the truth. Have you ever heard of the Non-farm Payroll (NFP)? Do you trade it? If you have and do, kudos! The NFP is a major influencer in the foreign exchange business. It affects not only forex, which means it’s a very important thing to know about. But we’re only interested here in how it affects foreign exchange and our trade. It doesn’t matter whether or not you live in the U.S.A. As long as you have an interest in foreign exchange, you should be concerned about the NFP reports when they are released. As a matter of fact, you have a choice.

Non-farm Payroll (NFP)

The non-farm payroll is nothing but statistics researched, recorded, and published by the U.S. Bureau of Labor Statistics. The figures represent the total number of workers or employees or basically people on the payrolls of all businesses except, as the name “non-farm” suggests, businesses connected with agriculture, general government work, private household businesses, and nonprofit organizations. It is a very influential statistic and economic indicator released monthly, usually on the first Friday of every month at 8:30 AM Eastern Time. The reason it’s very important is it affects things such as the US Dollar itself, the forex exchange market, stocks, and bonds. Almost everything is concerned with finances, and that’s why you as a forex trader, should be concerned and pay close attention to it. The NFP figures tell how many jobs were lost or created in comparison with the same numbers from the previous month. Basically what this does is report the state of the economy. More jobs would mean a better economy. From this, you can guess the “health” of the US Dollar and how this will affect its behavior in the foreign exchange market. You get the idea. The non-farm payroll accounts for a massive 80% of the labor force that produce the entire gross domestic product (GDP) of the U.S.A. Now, if my boring lecture about how influential and important the NFP is didn’t convince you, this fact should.

 

So you might have asked, “Why don’t they include businesses related to agriculture?”. Well, the simple reason is because farm jobs are seasonal, if you think about it, this makes sense. We want data that is consistent throughout all months. The same is true for private household businesses and some government jobs. It’s wise not to include statistics from these sectors to have a clear vision of what’s really happening, constantly, in the economy.

The NFP numbers report the net change in the number of jobs lost or created in the US. What do you think a high net change would mean? What would you expect of the US Dollar in that case? If a high positive net change occurs, it means there have been more jobs created, which means the economy has gotten strong and hence the US Dollar too, so the US Dollar then becomes bullish. This is what interests us as traders and informs us how to place our orders in the forex market. The opposite is true when there is a high negative net change. The US Dollar becomes bearish. So if your base currency is the US Dollar, it’s easy to go long or short when the reports come out with high positive figures or low figures (and negatives) respectively. If the US Dollar is your counter currency, you trade the other way.

Fundamental analysis is not centered around NFP numbers. There are many factors involved. Even political news gets to play a part in fundamental analysis, so do reports from central banks about interest rates and state economic factors like GDP and inflation reports among other things. Of course, you can’t keep a close eye on all of these things going on, that’s expected. But I wouldn’t turn a blind eye to the Non-farm Payroll reports! No serious traders ignore that. It’s OK if you didn’t know about it. And that’s why you should subscribe now to my mailing list so you don’t miss out on more tips like this in the future!

2 Responses to “What is Non-farm Payroll (NFP)?”

  1. this is a wonderful article and very informative. i didn’t know how much NFP meant in the forex circles. i see it’s very important.

  2. Exactly Mike. Hopefully you’ll start observing it from now. I do my best to bring great tips to my readers 🙂

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