Beware the NFP Report’s Effect on Slippage

06/04/2010 12:01 am EST

Focus: FOREX

I would like to remind traders of what is happening this morning, June 4, at about 8:30 am ET, which is when the US Department of Labor will release the most anticipated news report of the month: The US non-farm payrolls (NFP) report.

This report can result in increased volatility and a chance to profit handsomely in a short period of time. However, more often than not, new traders are not the ones profiting, but rather losing.

The main reason is slippage, which is when your order is filled away from the price you wanted. The reason for slippage is simple: Big traders stay away from these events and new traders all try to do the same thing at the same time. If the release is bullish for the EUR/USD, everybody wants to buy at the same time. However, most find that there is nobody willing to sell to them at their price. Eventually, your order is filled, but at the seller’s price. Soon you find the market moving against you and you exit to keep your losses from getting too big. But what about those who were selling to you? As the market continues to fall, you start to wonder about these traders who sold to you and the fact that they are now making money. What did they do differently?

These traders were playing the reversal and taking advantage of the fact that the first move after a release is often based on emotions and wrong. Here is a five-minute chart and an example of a reversal after a release of the non-farm payrolls report. We can see that just before the release, the EUR/USD was trading at 1.4892. After the release, the market started to rally up to near the 1.4940 level. The market then started to reverse and traders who were playing the reverse sold at the price the market was trading just before the release.

Click to Enlarge

The assumption here is that all traders who bought after the release are now in a losing trade and are selling to get out. So these new traders sell at 1.4892 to get in and use a 50-pip stop with a 100-pip limit order to take profit, which is what we recommend. This is our 1:2 risk/reward ratio and allows us to be profitable if only winning 40% of these setups. The market soon moved down 100 pips from the 1.4892 entry and rewarded those who were patient and reacted to the market environment, rather than the emotional first response to the release.

These reversal traders will also use the EUR/USD as much as possible in these situations because of the increased volume and better fills. But you don’t have to be first to get into the trade to be right; you just have to be patient and react to the market and not the news release. The EUR/USD doesn’t act like this on every release, but it does frequently enough to make this a valuable strategy.

By Thomas Long, contributor,
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