Non-Farm Payrolls Trading Strategies for Binary Options
Non-Farm Payrolls Trading Strategies for Binary Options
August 27, 2012The Nonfarm Payrolls report is considered to be one of the most influential indicators on the financial trading calendars for traders residing in the US as well as Non-US traders.
It is officially released for publication by the U.S. Bureau of Labor of Statistics and represents the delta or monthly fluctuation in the number of U.S. employees officially getting paid. This report excludes the following categories:
- Government Employees: This is considered a government expenditure and not a contributor of growth.
- Farm Employees: Due to the unstable nature of this industry payrolls change significantly.
- Employees of NPOs: NPO’s either don’t pay tax at all or pay significantly less, so they are not considered to be an engine of growth and are therefore excluded.
- Private Household Employees: This is also not considered to be a factor in economic growth.
Financial analysts and economists believe that Non-Farm Payrolls account for some 80% of the Gross Domestic Product (GDP) in the United States.
The latest release by the U.S. Bureau of Labor of Statistics was from June-July and indicated a growth of 163,000. The next release is scheduled to be on September 7th, 2012.
The Contract Specifications for Trading NFP on Traditional Binary Options Brokers Such as NADEX Are As Follows:
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Source: Nadex
Other Relevant Trading Information:
- Tick size is 1, and tick value is $1
- Minimum increment is 0.25
- Reportable limit is 12,500 for Economic Events, and there is no position limit
Other Key Financial Indicators for Trading Binary Options:
The Feds Fund Rate:
The Federal Funds Rate is the interest rate financial institutions like big banks or investment companies use when lending to each other.
The actual rate is determined in the open market, but the Federal Open Markets Committee (FOMC) sets their standard target federal funds rate as general guide lines. Fred Bernanke is Chariman of the FOMC as well as Federal Reserve and has direct influence on the actual rate. If the he and the board decide to buy and/or sell government securities in the financial markets the effect is immediate.
Jobless Claims Data:
This report is officially released by the U.S. Department of Labor, documenting weekly unemployment claims for government benefits
Usually when claims increase this is an indication of a weakening economy with stemmed growth due to a shrinking labor force. A decrease in benefit claims is typically a clear indication of a robust economy and a growing labor market. A robust labor market tends to have a positive economic effect indicating an increase in the number of jobs which in turn signals traders that there is bound to be an increase in spending power per household income resulting in higher consumption rates and of course economic growth.
Trading Tip! The Jobless Claims Data is published every week. I would not recommend deducing macro-level economic conclusions on one hand, on the other hand it serves as a valuable “market snapshot” especially when it is fresh. Combined with other financial indicators it can and should be an important component in the trading decision-making process.
Does NFP Influence Forex Trading?
It sure does! When NFP report is publicized it automatically influences the value of all major currency pairs. However, for some reason the traders love to speculate on GBP/USD.
Trading Tip! Forex markets are open for trading around the clock, so if you know how to analyze financial news you will be able to “trade the news event”.
Currency Pairs Trading Strategy – The Logic Behind the Strategy
Patience! Wait until amateur hour is over and the markets have simmered down a bit after the degree of influence has abated. Wait after the first 2-3 trading swings have ended and investors have analyzed the newly emerging figures, trends, and patterns and follow the news!
Once you feel the general direction is being set (above or below the resistance line), you start entering bullish trades in the direction of the emerging trend. Hold on!!! Wait for the right signals and indicators the market is showing you; eventually you will see the direction the rates are going. If you use this strategy and don’t become emotional or fixated about specific patterns or anomalies you will avoid making early trades hopefully you wont get whipsawed by market forces.
Some Basic Trading Rules, Tips, And Tools
1. Use the 5 or 15 minute charts when you start analyzing the figures (but not both), and don’t even dream of doing anything before the first bar of the NFP report is publicized.
2. Wait for the proper entry signals! You will usually see some erratic behavior followed by a strong momentum – either upward or downward swings.
3. Use variations of technical tools to get a better visualization of the charting. I personally opt for Bollinger Bands, my colleagues use moving averages – it’s all good!
4. When the second bar is displayed start looking immediately the hammers, handles, or Harami Crosses. You will eventually see a general trend emerging, now is the time to start taking risks and trade GBP/USD, EUR/USD, or CAD/USD. If you like other currencies as well feel free, I have a friend with a fetish for CHF, he has proven to me that this currency is resilient, however the other currencies have more trading volume so the market sentiment is less prone to polarization or statistical anomalies.
Trading Tip! Remember, follow the technical analysis and patterns & stick to the direction – this is a lesson well learned.
Don’t engage in more than 2-3 trades and don’t make additional trades if you end up losing your money instead of making more of it. Use the inside bar as a point of reference for making additional trades if you really feel it’s worth taking additional risk.
Stop trading after 4 hours – this is the time where the influence starts to dissipate and other market forces begin to kick in.
What are the Risks Involved?
1. If you misread the entry signals or alternatively don’t act in a resolute and decisive fashion when you trade you will enter a world of pain! For example, if you see a general trend or pattern starting to take place, but don’t act quickly enough, or alternatively act to slowly you will end up losing your investment.
2. It’s crucial to remember that during times of high volatility, specifically now with the Eurozone crisis taking place, other factors may end up influencing the outcome. That’s why you must have a stop in place, and never risk more than you can afford to.
To Sum Up
- Everything behind the strategy of trading NFP relies on your ability to wait for small consolidations and your ability to read the inside bar.
- Being patient and waiting for the initial fluctuations to take their course is the difference between you ending up in the money or losing your investment!
- Last but not least, don’t forget to have stops in place.
How Do You Trade Non-Farm Payrolls in Binary Options?
First of all you have to find the binary options broker that is right for you! I recommend looking at the reviews section located at the right panel and selecting any one of the recommended brokers.
Secondly, keep in mind in this type of scenario the risk is mitigated by the fact that you only have to guess the general direction and not to guess the exact range or rate.
Furthermore, trading the news with a specific emphasis on the NFP means you can always re-enter on 60 second trades based on the right entry signals after the first bar is completed.
Now let’s see how we can further implement what we have learned here.
Let’s say you are looking ant currency pairs and the NFP has just been released to the public. First of all – WAIT! Secondly, look at how the markets are behaving. Then, wait for the second bar to pass. Now getting into the actual trade scenario.
Let’s say you purchased $5,000 of contracts and you are considering to buy positions on EUR/USD betting against the EUR.The NFP report just arrived and it is showing that payrolls have decreased by 120,000. Naturally this would influence your decision and you would look for the right entry signals to buy EUR.
As in all cases, trading the news can be tricky particularly with the volatile European markets and the financial crisis they are facing these days. So in this type of scenario one would consider a neutral position, or alternatively start trading other currencies like CAD, CHF, or JPY.
