The NFP report (Non-Farm Payrolls) indicates the Bureau of Labor Statistics issues the United States economy every month. This report shows how many jobs in various industries were added or lost during the previous month, and it is an essential factor in predicting inflationary pressure.
This article will focus on trading around the NFP report within the Dubai stock market, including some best practices to use when approaching this event.
What happens before the NFP release?
Traders tend to flock towards large-cap stocks when anticipating higher volatility due to sudden events. Therefore, at this point leading up to the release, traders would be looking at companies like Emaar Properties PJSC, Arabtec Holding PJSC, or DP World. Have a look at Saxo Bank UAE for more on this.
You can apply different strategies to these stocks and the market as a whole.
How to trade around it
Watch the market closely during the release
Traders should be watching for a gap. A gap in the stock price is when it opens at a higher or lower price compared to where it closed the previous day after considering trading volumes. This event causes gaps because it has an error margin of +/- 100K, meaning miscalculating or underestimating could cause significant payroll changes compared to what the actual numbers show. The direction of this gap will depend on the economic data released, so if traders anticipate positive data, they would buy leading up to and right before the report gets released at 8:30 AM EST/3:30 PM GDT. If they anticipate negative numbers, they will sell going into and right after the release.
Monitor the market reaction
After a gap is created, traders should then monitor how the market reacts to this data and see if it carries on gaining momentum or flattens out with little movement for a while. A continuation of an uptrend following a positive number may be seen as a vital sign of an improving economy, thus causing more buying activity in stocks that lead up to it. Conversely, a flat or downward trend after a negative number may indicate deteriorating conditions and therefore reduce trading activities in those stocks leading up to it.
Actively seek opportunities
There is usually high volatility during the NFP report release, so actively seeking profitable trades should be highly considered by traders. Some actions could include buying pullbacks after positive reports or selling rallies on high volume after adverse reports.
Consider portfolio management
Traders should consider rebalancing their portfolios regularly to reduce risk as the market itself tends to be more volatile than usual during this time. Also, actively maintaining an eye on trading positions and closing them out when necessary, taking appropriate profits is essential in managing risk. There is always a chance for an unexpected result to significant losses if left unattended.
Stay liquid with your holdings
Even though it would seem like a good idea to trade around this event, traders should try to refrain from overtrading leading up to and right after the release. Liquidity is essential, so they shouldn’t expose themselves by taking too many risks.
Approach with caution
Even though there are some opportunities to trade around the NFP release, it is good practice to approach this event cautiously since there are usually high levels of volatility which can lead to significant changes in individual stock prices. Traders should have proper risk management strategies to protect their accounts from possible losses by following the best practices mentioned earlier.
Monitor for news flow afterward
Traders should pay attention to any upcoming or current events which could affect market sentiment or economic data. For example, the Dubai government may announce a new project which would cause an upturn in trading activities on companies associated with it. They should actively watch these types of events and adjust their trading strategies accordingly.
It is important to document both profitable and unprofitable trades to learn from mistakes in the future. Looking back at past events could help traders anticipate possible outcomes of similar situations in the future and avoid making mistakes that would cause significant losses.