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How to Trade Forex News Related to U.S. Employment Reports

How to Trade Forex News Related to U.S. Employment Reports

If we had to single out one piece of forex news that represents a consistently strong forex trading opportunity, that single piece of data would have to be the Non-Farm Payrolls Report or NFP, which is customarily released on the first Friday of every month at 8:30 a.m. Eastern.

Forex brokers and traders must follow these important tips: If you trade any currency pair that includes the U.S. dollar, you need to know the NFP number as soon as it comes out because it may affect your profit and loss statement in a major way.

The U.S. Fed's Overriding Mission: Prevent Pitchfork-Wielding Mobs
The central banks of most countries, including the United States, have two goals:
1. Restrain inflation
2. Encourage growth

Accomplishing both of these goals at the same time is what central banks are supposed to do. Failing miserably at one or the other of these goals is a recipe for civil unrest up to and including pitchfork-wielding mobs that riot in the streets.

Yes, the specter of pitchfork-wielding mobs is scarier in the case of more politically unstable countries, but anyone who lived through November of 2008 understands that the anger of the masses can happen in the U.S. as well, when the economic crisis is severe enough.

The "Great Recession," as it's being called, has been that severe of an economic crisis. And this has caused the Federal Reserve to act accordingly: Chairman of the Federal Reserve Ben Bernanke has promised to keep U.S. interest rates low for an "extended period."

When will this "extended period" of low U.S. interest rates end?

When the Non-Farm Payrolls report shows improvement. When the people who would consider picking up pitchforks are too busy working to bother with all that mess.

When the NFP number improves, U.S. interest rates may be allowed to go higher--but not until then. Mr. Bernanke has made that thoroughly and abundantly clear.

Therefore, compared to other currency trading strategies, the NFP number is the most important bit for forex news in the world.

"Good" and "Bad" Irrelevant, Consensus Is What Matters

When trading based upon the NFP number, or another employment-related number such as the ADP Payroll Survey, it's vital that you forget about notions of "good" and "bad" numbers. True to the nature of the forex markets, good and bad are relative, not objective, terms.

What matters is consensus. Divergence from consensus in the NFP number--either employment is stronger or weaker than expected--is where fantastic currency trading opportunity lies.

In the case of a prolonged trend, for instance the ascent of the EUR/USD as caused by a declining U.S. dollar, an NFP number that significantly varies from what everyone was expecting can be a catalyst to end one trend and start another.

If you can "guess right" ahead of the NFP report, you may be in for a profitable ride.

Precautions to Take When Forex Trading U.S. Employment Numbers

If you come prepared to the NFP number forex trading party, you can put yourself in a good position to capitalize on this extremely important piece of forex news. If you come unprepared to the NFP number forex trading party, you will get punished like a wayward child.

Precautions to take include:
-- Look at the price action for your chosen currency pair following past NFP number releases. What was the number and how did your chosen currency pair react to it?
-- Set your stops strategically. Never, ever trade the NFP numbers without a stop-loss order to protect yourself. Period. But at the same time, be careful of using stop-losses that are too close to the current price, because forex markets habitually swing wildly on NFP number news. Allow for some volatility by setting your stop-loss so that you are not stopped out of your trade before you even get a chance to watch it fly, but neither are you cashed out of your account if you're wrong.
-- Realize that employment numbers such as the NFP are frequently "revised," even to the point of the original numbers appearing, upon revision, false or misleading. You must therefore not only watch out for the NFP number, but any revision to the NFP number that may pop up.

Done right, trading the NFP is great fun. This report is one of the few that does actually move the markets every time, as millions of currency traders place a flurry of conflicting bets.

To thrive in such a chaotic environment, though, you must be prepared for chaos.

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