Open Account Trading Carries Risk

In this article, I will show you what kind of volatility and market movement could be expected after an NFP release in two major markets. The examples are from 2021 and show you what happens in EURUSD and XAUUSD (15 min. charts) during a 5h period after the NFP publication. And, why should you be interested? Okay, that’s a fair question. Here’s the answer. Let’s assume that you are a mean reversion trader who as a rule never trades with the momentum.

Btw, please note that this is only an example, not an endorsement of this type of strategy. Let’s further assume that you haven’t studied the typical price action around the NFP news releases but instead tend to apply the same strategy to all the markets, EURUSD and gold alike. However, as you can see below a mean reversion strategy isn’t as likely to work in EURUSD as it is in gold. Now, that’s valuable information right there! Okay, let’s take a look at these markets on NFP days in 2021. As I said in part 1 of this series: the past is never the exact representation of the future but it’s still the best guide we can ever have!

NFP Impact on EURUSD

The above graph shows the maximum impact (in pips) of NFP releases over the 5h following the NFP release. The change is measured as follows. Max. Change Up = the highest high of all 15-minute bars minus the last (15 min. bar) close before the NFP release. Max. Change Down = the lowest low of all 15-minute bars minus the last (15 min. bar) close before the NFP release. This gives us a chart that shows both the maximum positive and the maximum negative movement in EURUSD following the risk event.

What about the NFP impact on gold in 2021?

NFP impact on gold

The NFP impact on gold is recorded in dollars instead of pips. As we can see from the chart, gold can have substantial moves following the NFP releases. The market can fluctuate as much as 25 dollars during those five hours following the report. This means that on these trending days there are multiple opportunities to catch smaller high-quality trades.

These two charts help us to answer the following questions:

  1. What’s the maximum movement (up or down) the price is likely to move during each 5h observation period?
  2. What’s the biggest move (up or down) over all of the observation periods?
  3. What’s the average move and how often the size of the moves are near the average values?
  4. Are these markets more likely to move further to the upside or to the downside?
  5. Are gold and EURUSD likely to move in the same direction?

Most intraday traders seek to exploit the opportunities created in the aftermath of the risk events but don’t pay attention to these statistics. They are mesmerized by the big moves they sometimes see taking place on NFP Fridays but they really don’t have any idea if their observations only represent some rare events or, what the average moves after the NFP result publications are like. Effectively, they are trading with a limited understanding of the probabilities. And, as we should always remember, trading is a game of probabilities! 

If a trader is looking for a 100 pip move but doesn’t know the likelihood of such a price move taking place, his or her trading strategy is probably going to lose money. There’s no point in looking to make 100 pips in EURUSD say within a 2h time window on each NFP Friday if the market on average moves only 40 to 60 pips and only once or twice moves 100 pips or more. 

As we can see from the EURUSD impact chart, the maximum move over a 5h period following the Non-Farm payrolls release has most of the time (9 times out of 12) been less than 60 pips. Note that 7 times out of 12 the maximum movement in EURUSD over the same period has been less than 40 pips! Why would anyone then only try to hold for moves that are higher than that, leave alone trying to catch 100 pips? It makes much more sense to take profits once the market has moved 35 pips.

Let’s also take a look at the XAUUSD statistics. As noted earlier, following an NFP announcement gold can move as much as 25 dollars (2500 pips). This, however, isn’t a norm. It’s much more likely that gold will move less than 15 dollars over the 5h observation period we have applied in this study. Based on this one year sample of NFP related price action it’s also more likely that the price of gold will fluctuate more often on both sides of the anchor value (the last close before the NFP release) than EURUSD. 

This suggests that traders should look for trend or momentum trades in EURUSD and prepare to take mean reversion trades in gold more often than in EURUSD. We could also say that gold has more downside volatility than EURUSD. While EURUSD had six days during which it didn’t move below the pre-NFP close, gold only had only three similar days. 

The limitation of this small study is the sample size (12 months) and thus more observations would be needed in order to make the study statistically significant. This short article does, however, help you understand to what details an informed trader pays attention to when planning his or her trades. Whatever timeframe or strategy you trade these statistics help you to plan your trade better! 

We look forward to your trading related questions and are more than happy to cover them in our live trading strategy sessions. Send your questions to [email protected] and ask the support team to forward the questions to me. Also: Be sure you don’t forget to register for the next live webinar here: Tiomarkets.com/webinars. I look forward to seeing You there!  

Trade Safe,

Janne Muta 
Chief Market Analyst
TIOmarkets


Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. Professional clients’ losses can exceed their deposits. Please see our risk warning policy and seek independent professional advice if you do not fully understand. This information is not directed or intended for distribution to or use by residents of certain countries/jurisdictions including, but not limited to, USA & OFAC. The Company holds the right to alter the aforementioned list of countries at its own discretion.

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