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(Ref: posted on 12 January 2010 by Perry)
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This is an extremely effective forex strategy that I use for trading the Non Farm Payroll numbers. This strategy can be used on any news announcement, the key to trading this strategy is you want a substantial fundamental surprise. What I mean by this is you are looking for a dramatic change in the actual number compared with the forecast number. The bigger the surprise the better the opportunity exists for profits. What this surprise creates for technical traders is momentum and momentum means OPPORTUNITY.
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I Love the Non-Farm Payroll as in my honest opinion it is the best trading day of the month, If I were to only trade once a month then this would be it and as I have stated many times, you only need to master one trading method and you are on your way toward financial freedom. This would give anyone a realistic chance to trade as it requires only one day a month of your time and you really only need to trade for about five to six hours and your done. It is quite easy and far less time consuming as other methods to back-test as well.
I Love the Non-Farm Payroll as in my honest opinion it is the best trading day of the month, If I were to only trade once a month then this would be it and as I have stated many times, you only need to master one trading method and you are on your way toward financial freedom. This would give anyone a realistic chance to trade as it requires only one day a month of your time and you really only need to trade for about five to six hours and your done. It is quite easy and far less time consuming as other methods to back-test as well.
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I know a lot of people who won’t go near the market on this day as they are scared due to the volatility but it is this volatility that creates the best opportunities!
I know a lot of people who won’t go near the market on this day as they are scared due to the volatility but it is this volatility that creates the best opportunities!
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When there is no surprises in the announcement and I am not looking at any other trades on the higher time frames I will just turn off the computer and take the day of as it will generally be a choppy one.
When there is no surprises in the announcement and I am not looking at any other trades on the higher time frames I will just turn off the computer and take the day of as it will generally be a choppy one.
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First thing we need to do is identify what is a surprise so we know when to trade and not to trade. A surprise has to be a very substantial shift in the number from the forecasted number. I will use last months as an example as this is exactly what happened and thus there was a great opportunity for profits.
First thing we need to do is identify what is a surprise so we know when to trade and not to trade. A surprise has to be a very substantial shift in the number from the forecasted number. I will use last months as an example as this is exactly what happened and thus there was a great opportunity for profits.
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Now before I go any further there a many ways to trade these large announcements and over time I intend to cover a lot more of these but for today I am only going to discuss this one strategy to try and simplify things. For the numbers I will use Forex Factories calender as it is available to all and quite reliable. The only downfall to this is the number is generally delayed for two to three minutes but as this trading strategy is not about trading the news it is fine for this purpose.
Now before I go any further there a many ways to trade these large announcements and over time I intend to cover a lot more of these but for today I am only going to discuss this one strategy to try and simplify things. For the numbers I will use Forex Factories calender as it is available to all and quite reliable. The only downfall to this is the number is generally delayed for two to three minutes but as this trading strategy is not about trading the news it is fine for this purpose.
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Here I have inserted a picture of their calender on the day:
Here I have inserted a picture of their calender on the day:
(Pls refer Pic 1 above)
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You will note that the previous months number was 4k or four thousand more employed people than the previous month. This month the forecast is that there will be 3000 less employed people than last month, now look at the actual number. There was actually 85000 less employed people than the previous month and 82000 less than the forecast.
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You will note that the previous months number was 4k or four thousand more employed people than the previous month. This month the forecast is that there will be 3000 less employed people than last month, now look at the actual number. There was actually 85000 less employed people than the previous month and 82000 less than the forecast.
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This is a great example of a fundamental surprise, now if the number had been only 50k or less I would not trade. When the surprise is less substantial the trading day tends to get very choppy and therefore much more challenging to trade. What we are seeking is a very definite indication of market direction and when the surprise is large generally you will see the market move in the direction of the surprise. In this example the USA had 85000 less jobs and this is not good at all for their economy and therefor not good for their currency. The outcome is a weakening of the US Dollar or inversely a strengthening of there cross pair.
This is a great example of a fundamental surprise, now if the number had been only 50k or less I would not trade. When the surprise is less substantial the trading day tends to get very choppy and therefore much more challenging to trade. What we are seeking is a very definite indication of market direction and when the surprise is large generally you will see the market move in the direction of the surprise. In this example the USA had 85000 less jobs and this is not good at all for their economy and therefor not good for their currency. The outcome is a weakening of the US Dollar or inversely a strengthening of there cross pair.
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In this example I will use the Eur/Usd pair. So this number should see a substantial bull move in the Euro due to the sudden weakness in the greenback and this is exactly what happened:
(Pls refer Pic 2 above)
In this example I will use the Eur/Usd pair. So this number should see a substantial bull move in the Euro due to the sudden weakness in the greenback and this is exactly what happened:
(Pls refer Pic 2 above)
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Now for the rules:
• We trade the 5 min chart
• First and foremost, we are only interested in trading in the direction of this fundamental shift so in this scenario we are only looking to buy or go long.
• We do not trade at all for the first fifteen minutes after the news is released.
• For the divergence I use the Stochastic Oscillator and the settings I use are 5,3,3.
• What I am looking for is divergence between the oscillator and price to give me a signal to take a long position.
Now for the rules:
• We trade the 5 min chart
• First and foremost, we are only interested in trading in the direction of this fundamental shift so in this scenario we are only looking to buy or go long.
• We do not trade at all for the first fifteen minutes after the news is released.
• For the divergence I use the Stochastic Oscillator and the settings I use are 5,3,3.
• What I am looking for is divergence between the oscillator and price to give me a signal to take a long position.
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OK lets walk through the setup know and see just how to trade it. Once the news has been released we wait patiently for the first fifteen minutes and then we can start looking for our entry. There was an opportunity in this instance that appeared just shy of two hours later. After I have identified the divergence I then need to calculate my position size.
OK lets walk through the setup know and see just how to trade it. Once the news has been released we wait patiently for the first fifteen minutes and then we can start looking for our entry. There was an opportunity in this instance that appeared just shy of two hours later. After I have identified the divergence I then need to calculate my position size.
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For this trade we placed our entry after the stochastic turned up confirming the divergence and also signaling our entry, this was at 1.4322. To calculate our position size we need to know where our stop is and in this instance we would place our stop below the previous low, this was at 1.4294, this gave us a stop-loss of 28 pips.
For this trade we placed our entry after the stochastic turned up confirming the divergence and also signaling our entry, this was at 1.4322. To calculate our position size we need to know where our stop is and in this instance we would place our stop below the previous low, this was at 1.4294, this gave us a stop-loss of 28 pips.
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I will just go through how I calculate this just for those that are unsure. We will assume that I have a trading capital of $10 000 and am risking 1% of capital per trade. So 1% of 10k is $100 dollars, to calculate my position size i simply divide 100 by my risk of 28 pips which would give me 100/28=3.5. This equates to either 3 mini lots or 35 micro lots depending on your trading platform.
I will just go through how I calculate this just for those that are unsure. We will assume that I have a trading capital of $10 000 and am risking 1% of capital per trade. So 1% of 10k is $100 dollars, to calculate my position size i simply divide 100 by my risk of 28 pips which would give me 100/28=3.5. This equates to either 3 mini lots or 35 micro lots depending on your trading platform.
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All that’s left to do now is place your target and for this I would use the previous high and this was at 1.4400. This particular trade had a total risk of 28 pips and a total reward of 78 pips so a risk to reward ratio of 2.8:1.
All that’s left to do now is place your target and for this I would use the previous high and this was at 1.4400. This particular trade had a total risk of 28 pips and a total reward of 78 pips so a risk to reward ratio of 2.8:1.
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Here is an image of the trade:
(Pls refer Pic 3 above)
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This is a simple strategy that is very effective if you have the patience to wait for the setup and the control to sit by and watch some very substantial moves that generally precede this trade. This is the trade in its simplest form, I have an advanced way I trade this setup and that is once the divergence is confirmed I look for a significant candlestick pattern to give me an entry and a stop position. What I look for is either an engulfing pattern, a pin bar or an Inside bar to trigger the trade and then place my stop on the other side of the pattern.
Here is an image of the trade:
(Pls refer Pic 3 above)
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This is a simple strategy that is very effective if you have the patience to wait for the setup and the control to sit by and watch some very substantial moves that generally precede this trade. This is the trade in its simplest form, I have an advanced way I trade this setup and that is once the divergence is confirmed I look for a significant candlestick pattern to give me an entry and a stop position. What I look for is either an engulfing pattern, a pin bar or an Inside bar to trigger the trade and then place my stop on the other side of the pattern.
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In this particular scenario you could have used the breakout above the inside bar and placed your stop just below it. What this achieves is a much smaller stop and thus the potential for larger position size and thus greater profits. In this case our entry would have been at 1.4321 with our stop at 1.4305. This would have reduced our stop to only 16 pips allowing us to take a position of 6 mini lots or 6.2 micro lots.
In this particular scenario you could have used the breakout above the inside bar and placed your stop just below it. What this achieves is a much smaller stop and thus the potential for larger position size and thus greater profits. In this case our entry would have been at 1.4321 with our stop at 1.4305. This would have reduced our stop to only 16 pips allowing us to take a position of 6 mini lots or 6.2 micro lots.
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Now this also offers greater potential of being stopped out so it totally depends on your appetite for risk as to the way you personally take these trades. I am inclined to take the lowest risk trades as I have learn t that risk is the only thing I have any control over in this game and when I am right I prefer to be positioned well for it.
Now this also offers greater potential of being stopped out so it totally depends on your appetite for risk as to the way you personally take these trades. I am inclined to take the lowest risk trades as I have learn t that risk is the only thing I have any control over in this game and when I am right I prefer to be positioned well for it.
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So from here if this style of trading appeals to you then back-test it, try it and then implement it into your arsenal of trading tools.
So from here if this style of trading appeals to you then back-test it, try it and then implement it into your arsenal of trading tools.
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I have a few other methods that I use to trade the NFP but will save those for another article.
I have a few other methods that I use to trade the NFP but will save those for another article.
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- Perry -
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