GBPUSD is one of the most traded FX pairs, owing to the size and stability of both the British and the US economies. Due to this popularity, the pair enjoys high liquidity, which means you can enter and exit positions with ease. It also offers competitive bid-ask spreads, which is very attractive to traders. One factor that greatly influences the price of this pair is the employment report, especially the Non-Farm Payroll (NFP) report from the United States.
The Non-Farm Payroll report
The NFP report is a measure of the change in the number of employed people in the United States. It includes employees of any registered business but exempts employees of the government, non-profit organizations, private households, and of course, farm employees. It is released by the Bureau of Labor Statistics every first Friday of the month, at 08:30 EST.
This report is very informative about the state of the US economy. This is because the more people are employed, the more their disposable income. A high disposable income, in turn, translates to more consumer spending, which stimulates economic growth. Therefore, when the report comes out higher than expected, it is usually positive for the dollar. This means that the GBPUSD pair’s price would plummet after such a report.
On the flip side, a lower-than-expected reading points to a struggling US economy. This may force the Fed to embrace expansionary measures, such as lowering interest rates to stimulate economic activity. Usually, this is bearish for the greenback. Such a report would manifest in a rally for the GBPUSD pair.
Initial price moves following the NFP report
The minutes after the release of the NFP report often causes a spike in volatility of the GBPUSD pair. Long-term traders are usually the first to react after such a release, and their large transactions cause significant price moves for the pair. For that reason, it is not uncommon to see a knee-jerk reaction in the opposite direction than the one you would anticipate.
Therefore, if you’re a day trader, it is always wise to wait a few moments after the report’s release before trading it. Prices may fluctuate for a few minutes after the report’s release traders who took positions before the report’s release. However, more often than not, there will always be a pullback after the initial reaction, which gives opportune entries for a trade.
Spotting a trade opportunity
A good strategy to use would be to aim for 30 pips in profit. It is not uncommon for GBPUSD to move 30 pips after the release of the NFP report. The bigger an initial move the pair makes after the report, the easier it is to anticipate the direction of price movement.
Once the initial price move fades in momentum, a pullback often occurs, which gives our entry point. If the initial move was bullish, you should draw a trendline connecting the initial move’s high to the high of the pullback on a one-minute chart. Once the price breaks this trendline, you should open long trade.
Alternatively, if the initial move was downward, you should draw a trendline connecting the low of the initial move to the pullback’s low. After prices break this trendline, enter a short trade. Whichever trade you end up placing, it is always wise to employ an appropriate stop loss, just in case the market moves against you.
Setting a profit target
To set an appropriate target, a good rule of thumb is to always aim for half of the magnitude of the initial move. If the initial price move after the NFP report’s release was 200 pips long, then you should aim for a profit target of 100 pips from your entry.
Determining the appropriate position size
|Lot size||Units||Volume||Pip value|
Table of lot sizes and corresponding pip values.
Position sizing is a vital part of risk management. As a rule of thumb, you should never risk more than 1% of your account balance on a single trade. Further, your risk to reward ratio should be above 1:1. This is to mean you should aim for more profit than you stand to lose.
When trading the NFP report, once you have established your profit target and the position of your stop-loss, you can easily calculate the most appropriate position size. Let’s assume you have a $10,000 account, and you’re aiming for 100 pips in profit. You place your stop loss 50 pips away from your entry position, a risk to reward ratio of 1:2.
Following the 1% rule, your risk should not exceed 1% of $10,000, which is $100. This means you can trade a maximum of 2 mini lots using a 2:1 leverage, which will value your trade at $20,000. If your stop-loss is triggered, you’ll have lost 50 pips * 2 * $1 = $100. Similarly, if your profit target is hit, you’ll have made a profit of 100 pips * 2 * $1 = $200.
Word to the wise
If it’s your first time trading the NFP report, it is always wise to backtest your strategy before risking money on it. If it shows a promising profit potential, you should try trading the strategy with a demo account so that you can anticipate any changes in market conditions and how best to deal with them. This way, you’ll be able to adapt to any situation that comes up when trading the result of the NFP report.
Employment figures offer valuable insights into the performance of the GBPUSD pair. The most impactful statistic is the NFP report out of the US, which is released every first Friday of the month. This report speaks volumes of the state of the US economy, which in turn informs the performance of the dollar. A lower than anticipated NFP figure is bearish for the dollar and bullish for the GBPUSD pair, while a higher than anticipated figure drives the pair’s value down. When trading the result of this report, it is always wise to wait for the pullback before entering any trades.