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Trading the Non-Farm Payroll Report: One Student's Trade

Discussion in 'Jarratt Davis- Trading Signals' started by Jarratt Davis, Jan 6, 2017.

  1. Jarratt Davis

    Jarratt Davis Special Consultant to the FPA

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    Today the US released its main employment report of the month. The expectations entering the event were for 175k jobs to be created and the average hourly earnings component to come in at .3%

    The actual number missed on the headline at 156k but the average hourly earnings component came in better at .4%.

    Analysis leading up to the event stated that with the recent positive EUR sentiment, if the employment report missed expectation--there was definite scope for the EUR/USD to appreciate into the weekend.

    As soon as the employment report came out the EUR/USD popped higher on the headline miss but then proceeded to drop over eighty pips from the highs. How could the EUR/USD drop this much on a “bad” headline employment report?

    The answer comes from one of the key’s to understanding fundamental analysis. Central bank policy often drives the long-term and sometimes short-term direction of a currency. So if the Bank of Japan is printing money the JPY will depreciate. If the Bank of Australia is hiking rates, the AUD will appreciate.

    Central banks will often give detailed descriptions of what they are looking for in order to hike or cut rates or change other types of monetary policy.

    In this example, the Federal Reserve is in the process of hiking rates which increases the dollar’s strength. They have specifically said that they are concerned about inflation still remaining too low. The more signs of inflation they see, the more they are encouraged to raise rates which equals a stronger dollar.

    In the employment data, a higher average hourly earnings component points to higher inflation. The Fed right now are looking at the average hourly earnings component as more important than the headline figure. That is the reason the USD strengthened while missing on the headline figure because the average hourly earning component beat expectations.

    Does all this sound a little complicated? While it may seem that way at first, with a little practice it becomes simple. All we were really looking for in this event is to see where the average hourly earnings component came in at. That is the main catalyst for the move even though the headline missed and even though the previous month was revised higher.

    One of my students recognized the dollar strength in the market and scalped a few pips after the employment report. He sent the screen shot over to me. He did his research, understood where the sentiment was coming from and scalped a trade short on the EUR/USD after the employment report came out. Check it out below.

    snip #3.PNG


    Sometimes there is a misunderstanding about fundamental trading-- that you are always trading big risk events or you only really trade where there is some huge event like Brexit or something like non-farm payrolls. This is not the case at all.

    Many times, good trades can come from risk-on/risk-off sentiment or comments from Fed officials or dollar strength or weakness from other sessions. The reason I gave this illustration is simply to highlight that you need a good fundamental or sentiment based reason to take a trade.

    When you have a good reason, those are the best trades. When it’s all combined with simple technical analysis and appropriate risk management your trades become consistently profitable over time.



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    Don’t forget to check out our exclusive Facebook group where you can meet me and interact with our entire community of fundamental traders!
     

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