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 in the US, covering about 26 million employees.
Why ADP Employment Change Matters
- Early Indicator: As it precedes the NFP report, the ADP Employment Change offers early insights into labor market conditions.
- Market Influence: Significant deviations from expectations can lead to notable market reactions, particularly in currency and equity markets.
- Predictive Value: While not always perfectly aligned, the ADP report can shape market expectations for the upcoming NFP release, influencing trading decisions.
Why ADP Employment Change May Lack Significance
- 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.
- 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.
- 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.
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. Use our Professional Economic Calendar, which includes a fundamental guide, to stay updated on the Fed’s priorities.
Step 2: Use High-Low Expectation Forecasts
Professional traders use high-low forecasts to gauge market expectations accurately. Here’s a more detailed look at 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, providing their best estimates on upcoming data points. Professional economic calendars include both high and low estimates, showing 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 the EUR/USD is particularly sensitive to economic data and the ADP report shows a significant deviation, this pair could be an ideal target for trading.
- City Economic Surprise Index: This report identifies currency pairs that react strongly to economic surprises, highlighting sensitive pairs.
- Risk-Reversal Report: Reveals market positioning and options build-up on certain currency pairs, helping traders choose responsive markets.
- CFTC Report: Details hedge funds' positions, indicating potential market movements based on fund activities.
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 the reason data points are focused on cause volatility. In addition, sometimes the central bank is focused on a data point inside a data point. For example, the Federal Reserve has often called out average hourly earnings as the key metric they look for inside the Non-Farm Payroll 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.
After the Initial Run
Move your stop-loss to break even as soon as possible to protect your gains. The stronger the release, the shallower the pullback. 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.
After the Initial Run
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.
Conclusion
While the ADP Employment Change report may not always lead to significant market movements, understanding its nuances and using a professional trading strategy can help you capitalize on unexpected deviations. If you don’t have the tools mentioned above, try out our Professional Economic Calendar Package and use institutional tools to level the playing field.
By following these steps, you’ll be well-prepared to trade the ADP report effectively, leveraging the same strategies that professional traders use to profit from this economic data release.