How to Trade the ADP Employment Change: A Comprehensive Guide

Introduction

The ADP Employment Change report offers a glimpse into the private sector employment trends in the US, released monthly by the ADP Research Institute.

This guide will share the exact strategy that professional traders use to gain an edge over the 95% of losing retail traders. By following our step-by-step guide, you'll learn how to effectively trade the ADP Employment Change report and enhance your trading outcomes.

Understanding the ADP Employment Change Report

The ADP Employment Change report provides an estimate of private sector employment growth or contraction. Released two days before the official Non-Farm Payrolls (NFP) report, it is considered a precursor to the NFP and a significant indicator of labor market health.

What is ADP?

ADP, or Automatic Data Processing, Inc., is a company that provides human resources management software and services. The ADP Research Institute produces the ADP Employment Change report, which is based on:

Anonymized payroll data from approximately 500,000 companies
Coverage of about 26 million employees in the US
Focus exclusively on private sector employment

Why ADP Employment Change Matters

1. Early Indicator

As it precedes the NFP report, the ADP Employment Change offers early insights into labor market conditions. This timing advantage allows traders to position themselves ahead of the more significant NFP release.

2. Market Influence

Significant deviations from expectations can lead to notable market reactions, particularly in currency and equity markets. When the actual number differs substantially from forecasts, it can trigger immediate volatility.

3. Predictive Value

While not always perfectly aligned, the ADP report can shape market expectations for the upcoming NFP release, influencing trading decisions and positioning ahead of the more critical employment report.

Why ADP Employment Change May Lack Significance

While the ADP report provides valuable insights, traders should be aware of its limitations:

1. Predictive Inaccuracy

The correlation between the ADP report and the NFP can vary, leading to instances where the ADP report does not accurately predict the NFP results. This inconsistency can sometimes diminish its trading value.

2. Private Sector Focus

The ADP report only covers private sector employment and excludes government jobs, which can sometimes lead to discrepancies compared to the NFP, which includes both private and public sector employment.

3. Market Expectations

Traders may sometimes discount the ADP report if it consistently shows less predictive value, focusing instead on other leading indicators or the NFP itself. This can reduce the market's reaction to ADP surprises.

Trading Strategy for ADP Employment Change

Step 1: Analyze Federal Reserve Priorities

Understanding the current focus of the Federal Reserve is crucial. If the Fed is closely monitoring employment data, the ADP report will have a heightened impact on market volatility.

Key Point: A Professional Economic Calendar includes a fundamental guide to stay updated on the Fed's priorities and current data focus.

Step 2: Use High-Low Expectation Forecasts

Professional traders use high-low forecasts to gauge market expectations accurately. Here's why these forecasts are essential:

Institutional Forecasts

Professional economic calendars include high and low estimates from top institutions, providing a comprehensive picture of potential outcomes.

Market Shocks

When a report exceeds the high estimate or falls below the low estimate, it often results in sharp market movements due to the unexpected nature of the data.

Lightning Bolt Feature

This tool signals deviations above the high or below the low of analyst expectations. Quick reaction to unexpected data can differentiate between a profitable trade and a missed opportunity.

Understanding High-Low Forecasts: Economic forecasts are based on surveys from credible institutions. Professional calendars show the full range of expectations. Trading opportunities arise when data releases fall outside these estimates, causing significant market reactions.

Step 3: Choosing the Most Volatile Instrument to Trade

Using insights from institutional reports, traders can select the most responsive currency pairs or assets. For example, if EUR/USD is particularly sensitive to economic data and the ADP report shows a significant deviation, this pair could be an ideal target.

City Economic Surprise Index

This report identifies currency pairs that react strongly to economic surprises, highlighting sensitive pairs that offer the best trading opportunities.

Risk-Reversal Report

Reveals market positioning and options build-up on certain currency pairs, helping traders choose responsive markets with potential for significant moves.

CFTC Report

Details hedge funds' positions, indicating potential market movements based on fund activities and potential position unwinding.

Trade Execution Steps

Confirm Fed Focus

Ensure the Federal Reserve is currently emphasizing employment data. If employment is a primary focus, the ADP report is more likely to move the market.

Remember: If the central bank is focused on the data point, it's because they are using that data point to make a decision on rates. This is why data points that are focused on cause volatility. Sometimes the central bank is focused on a data point inside a data point, like average hourly earnings inside the NFP report.

Check Forecast Ranges

Review high and low forecast expectations before the data release. Plan to trade only if the actual data significantly exceeds the high estimate or falls below the low estimate, ensuring a response to genuinely surprising data.

Monitor Revisions

Check for conflicting revisions in the data, as these can alter the initial market reaction. Ensure the primary release and any revisions align to support your trade.

Enter Trade Promptly

Once you confirm the deviation, act quickly to enter your trade within the first 30 seconds. Speed is crucial, as market reactions to significant data surprises occur rapidly.

Set Stop and Take Profit

Stop-Loss: Place your stop-loss below the low of the initial spike candle to protect against adverse movements
Take Profit: Aim for 15-30 pips for tier 2 events like ADP, adjusting based on market conditions and volatility

Managing the Trade

After the Initial Run

Look for a shallow pullback around a 23% Fibonacci retracement or near support/resistance levels. This initial pullback can provide an opportunity to enter the trade again after taking a few points off the table after your first entry.

Move to Break Even

Move your stop-loss to break even as soon as possible to protect your gains. The stronger the release, the shallower the pullback.

Warning: If the market doesn't buy off your support/resistance level and continue to the highs of the one-minute candle, consider reassessing the trade.

Reentry Strategy

If your initial position is stopped out at break even, consider reentering at deeper retracements, such as the 38% or 50% Fibonacci levels. Use nearby support and resistance levels to guide your reentry points.

Key Takeaways

ADP Employment Change is released two days before NFP, offering early labor market insights
Report covers 26 million private sector employees but excludes government jobs
Predictive accuracy for NFP varies - sometimes reliable, sometimes not
Trade only when actual data significantly exceeds high or falls below low forecasts
Use institutional reports to select the most volatile currency pairs for optimal trading
Enter within 30 seconds, aim for 15-30 pips, and move to break even quickly