How to Trade Forex With NFP V-Shaped Reversal
The Nonfarm Payroll (NFP) report often leads to a V-shaped reversal in the forex market after its release as it directly indicates a country's economic condition. The report represents the number of people employed over the previous month in an economy excluding private households, non-profits and farm-related jobs. An NFP report can directly affect the forex market and indicate traders about significant price levels where markets can potentially reverse. In our article, we will understand everything about NFP V-shaped reversal and how one can utilise it to their benefit.
What is an NFP V-shaped reversal?
A Non Farm Payroll (NFP) V-shaped reversal refers to a sudden increase or decrease in the currency pair prices right after an NFP report is released. An expanding NFP means that more people are getting employed, and the economy is rising, leading to a rise in the currency pair prices (an upward V-shaped reversal). However, a contracting NFP signifies that fewer people are employed than the previous month. This indicates a falling economy, leading to a decline in currency pair prices (a downward inverted V-shaped reversal).
Types of V-patterns
1. V tops
A V top is an inverted V-shaped pattern that occurs during an uptrend and leads to a downtrend reversal. The sharp peak indicates a temporary aggressive rise in currency pair prices after a positive NFP report. After that, the prices sharply fall, leading to bearish market sentiment. The reversal occurs in four phases.
- The first movement in the price is a straight upwards run with minimum or no pauses at all.
- The second movement occurs when the price reaches its highest price level to form the ‘V top’ and starts falling thereafter.
- The third movement occurs after the price falls even below the trendline drawn at the low of the pattern, confirming a downtrend and signalling traders to short or sell the trade as soon as possible.
- The last movement is when the price continues to fall below the low trendline (also called neckline) without any pause and marks a bearish trend.
2. V bottoms
A V bottom is a V-shaped pattern that occurs during a downtrend and leads to an uptrend reversal. The sharp decline indicates a temporary aggressive fall in currency pair prices after a negative NFP report. Thereafter, the prices sharply increase, leading to bullish market sentiment.
- The first movement in the price is a straight downwards run with minimum or no pauses at all.
- The second movement occurs when the price reaches its lowest price level to form the ‘V bottom’ and starts to fall thereafter.
- The third movement occurs after the price increases even above the trendline drawn at the high of the pattern, confirming the uptrend and signalling traders to long the trade as soon as possible.
- The last movement is when the price continues to increase above the high neckline of the pattern without any pause and marks a bullish trend.
How currencies are impacted by the NFP V-shaped reversal?
Major currency pairs
Major currency pairs are the ones that include the USD as one among the two currencies like USD/AUD, USD/JPY, etc. NFP release is positively linked with the USD as the report is a key economic indicator of the US. This is why an expanding NFP number leads to a strong USD in the forex market and vice versa. When the USD strengthens, the currencies paired against it weaken, and when the USD weakens, all currencies paired against it appreciate.
Minor currency pairs
Minor currency pairs are the ones that do not include USD as either of the two currencies like AUD/JPY, CHF/JPY, CAD/AUD and more. The impact of an NFP release on these currencies significantly depends on the commodities market. Countries that are big exporters of certain commodities like oil, precious metals, etc., are negatively impacted when commodity prices fall. This is because the commodities market is valued in USD, and an inverse relationship exists between the market and the US dollar. An appreciation in the USD leads to a higher commodity purchasing power with the same amount of USD. Hence, a negative NFP release leads to the USD strengthening, which results in the commodity market weakening, finally leading to the minor currencies that are big exporters of these commodities depreciating as their purchasing power falls and vice versa.
Exotic currency pairs
Exotic currency pairs are the ones that include one major currency and one currency from an emerging, strong yet small economy like USD/MXN, USD/HUF, USD/SEK, etc. An expanding NFP leads to USD price appreciation and a price depreciation of the currency paired against the USD and vice versa.
Trading the NFP V-shaped reversal pattern
1. Identify a prior trend in the market. There should be a temporary spike or fall in prices either in an upwards or downwards direction.
2. In an uptrend, open a short position right after the prices fall below the neckline (or on the neckline) and in a downtrend, open a long position right above or on the neckline.
3. Place a stop-loss order at the V bottom or lowest price level in a downtrend (V-shaped reversal) and above the neckline in an uptrend (inverted V-shaped reversal).
4. Place a take profit order at a height double to where the NFP report was released in a downtrend and at the V top or highest price level in an uptrend.
5. Monitor trades and wait for the reversals to open long or short positions accordingly. An NFP report enables you to open a long position at the V bottom and a short position at the V top to place successful orders. Exit the order when the market reverses again at later stages.
Benefit from the sharp NFP V-shaped reversal price moves
Trading the V-shaped reversals after an NFP report release allows traders to place long or short orders before there is an aggressive price incline or decline. Start trading with Blueberry Markets to make the most of the NFP reports and make significant profits. Sign up for a live trading account or try a risk-free demo account.
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