Many people trade Non-Farm. How could you not, right? After all, it’s one of the biggest‘events’ in the Forex – on the first Friday of every month (for the most part), traders of all ages, levels of experience, and varied abilities, get together to trade what’s known in America as the “Super Bowl” of Forex trading.
I am NOT one of those traders. But, should I be?
There’s no question that Non-Farm like most major news events tends to create generous short-term moves that can yield big results. With any fundamental event or announcement, there are general rules for how to play these things – for one, there’s the previous number which gives us good context – An announcement might seem very negative in this instance, but when placed in context – perhaps the figure released isn’t so bad. Second, there’s the expectation – what is the figure or announcement expected to be? In cases where there’s a board or committee (interest rates is the big one), there’s the vote – of the decision makers involved in this release, who’s got a hawkish sentiment and who’s got a dovish sentiment toward the overall economy? Finally, there’s the actual number itself. These three factors are the main fundamental considerations when trading Non-Farm.
Assuming you’ve gotten in on the right side of the move, and the market actually has a definitive, decisive reaction, you could conceivably stand to gain a decent profit in a very short period. You don’t have to take my word for it – let’s have a look at some historical examples –
First, let’s look at the most recent NFP move. To illustrate the point, we’re going to be looking at GBP/USD.
April’s report would have yielded a respectable 67 pips profit on GBP/USD. The question is though, would you have generated a profit? Well, that depends upon whether you entered Buying. Let’s play out the logic – as the number released (263k) greatly exceeded expectations (181k), the result for the USD should be positive. Right? Well, if we’re buying GBP/USD, it’s because the USD is WEAKENING against the GBP.
Clearly, this is counter intuitive. The report was positive, but the reaction was negative. Let’s now look at March’s report, which of course was released in April:
The reported number of jobs added (196k) exceeded the expectation (172k), yet the market barely reacted at all.
The news of a report which woefully under performed expectations would be viewed as bad for the USD, right? Well, the market had a different reaction in mind, and pushed the cable down (indicating strength for the USD).
Now, let’s look at January’s report, released in February:
1 February 2019
Once again, we see a reported number (304k) greatly outperforming expectations (165k). Yet, the market was unphased – the positivity for the USD seems already priced in.
Finally, let’s look at December’s figures, released, of course, in January:
4 January 2019
Here again, the reported number (312k) greatly exceeded expectations (179k). Though the market pushed the cable upward +61 pips, the amount of risk on the trade would have been prohibitive, and the move was soon over.
Are you seeing the problem yet? If you traded NFP consistently since the start of this year, you would have had 2 wins and 3 losses. So, your success rate would have been 20/80 win/loss. If you back test over an extended period, you could maybe stretch that to a 50/50 success rate. Maybe. And that’s assuming you got in, at the right time and in the right direction, in the instances where a trade was even possible at all.
Reward: Risk and Equity Management
With a 50/50 success rate, what should your reward:risk ratio have to be?
Well – take 10 trades as the example. If you’re risking 1:1, you would have broken even (5 winning trades 5 losing trades). Hardly worth it.
Bump the ratio to 2:1, and you’re quickly looking at a virtually impossible scenario – the pre-announcement ranges the market produces are NOT nearly large enough to yield enough “wiggle room” to allow the market room to wave. If you traded any NFP report so far this year, you would not have walked away with a 2:1 profit in any instance. Even 1.5:1 would still be pushing it.
Understand, I am not saying YOU shouldn’t trade Non-Farm. As mentioned, and as you can see with these examples, if you’re in on the right side of the move, chances are you’re likely to benefit from a quick, short-term profit. The trouble is this – there’s more nuance to the fundamental trading question generally, and as it pertains to NFP – it’s not a binary, direct causal relationship. In other words, it’s not as simple as “Good means BUY” and “Bad means SELL.”
Markets are inherently emotional. Markets during fundamental events or announcements, are operating under peak emotion. So, applying a ruleset based on logic, in an environment that is highly emotionally charged, is counterintuitive. The examples shown where trades a) took place at all and b) were profitable, are the exception, not the rule. Don’t believe me? Have a look back at all the NFP results and corresponding market moves over the past 24 months. You’ll find, more often than not, the market moves counter-intuitively, if it moves at all. We haven’t even touched on the issues around slippage, spreads, commissions, and unfilled orders, which are arguably the even bigger problems with trading NFP.
I used to trade Non-Farm. I’ve made some great money trading Non-Farm. I’ve also lost good money trading it. But hanging your hat on a single monthly event – or indeed, hanging your hat solely on fundamental trading, is not conducive to a consistent winning strategy. Perhaps as part of an overall portfolio of strategies you might find space for it. If you’ve never traded Non-Farm before, you probably should do at least once.
But I choose to abstain, as I do not like situations which yield such high levels of risk and minimal returns. For more information on trading, or to speak with professional traders who can help you assess what’s missing from your trading strategy, get in touch! Book a Free Consulation here