Hi and welcome again to the Trader Hindsight. This past week, we waited with great anticipation for the US Non-Farm Payrolls release. (You can check out all the big releases in the Weekly Calendar.) A leading indicator of US unemployment, Non-Farm Payrolls is the grand daddy of economic indicators that traders all around the world wait up to see. It didn’t disappoint this past Thursday. With analysts expecting a fall of “only” 360,000 jobs in June, the figure came in at a very disappointing -467,000. Indices tanked as the Green Shoot rally finally came to an end. Now I’ll look at the some of the profitable trades we could have made from this.

Strategy
There are three general types of trades that could be made here:

1. Estimate what the Non-Farm Payrolls figure is going to be. If you’re leaning towards it being worse than expected, go short, better than expected, go long.
2. Put a buy order slightly above the market price just before the figure is released and a sell order below the price. Then hope for a large price movement. With Non-Farm Payrolls, you’re nearly guaranteed that. The aim is that only one of the orders is hit and that the price then goes way beyond your entry point.
3. Wait for the initial knee jerk price reaction from the release to pass and trade the movement after that.

While all three are valid, and profitable when done correctly, methods, I’m going to look at the third one here. Another great feature of Non-Farm Payrolls is that, despite being a US release, it affects nearly every financial market around the world. You could trade it through Brent Crude Oil, EUR/JPY or the Japanese Nikkei. Here I’m going to use the FTSE 100.

As we can see from the two minute chart below, the FTSE fell 20 points straight after -467,000 hit the newswires. The next candlestick shows that for the two minutes after that, nothing really happened as traders sped-read the rest of the report. This short period of consolidation nearly always happens as traders wait for other traders to make their next move. This was my chance to make my move and short the FTSE. So at 13:32, I opened a €10 a point short position at 4282.

Where To Put Stop And Limit Levels
When trading economic releases, I use the initial price reaction as a guide to choosing my stop loss level. I often place the stop loss about 2/3 the difference between where I got in and where the price was before the release. In this case, the FTSE 100 was trading at 4302 moments before the release. I got in at 4282 so that’s 20 points of a difference. Using the 2/3 rule, I placed my stop loss level 14 points higher at 4296.

Placing limit orders is trickier when you’re trading economic releases / fundamental news because you may not have any technical indicators or levels to guide you. One option is to calculate two times the initial movement and place your limit order that amount away from your open position. As 20 points was the initial movement, you would place your limit order 40 points below your entry. Another option is to look for patterns in the subsequent movement and actively manage the position. That tends to be what I do when trading economic releases.

Outcome
So after I got into my position, sentiment stayed very bearish. The FTSE started to trend downwards for a couple of hours. At about 15:30, the price began to stabilise and started ranging, a bad sign for my short position. The final straw came at 16:00 when the downtrend line was broken. I closed out at 4243, taking a 39 point gain. At €10 per point, that’s €390 profit in a couple of hours.