How to Trade the ADP Employment Change
Table of Contents
Introduction
The ADP National Employment Report is published by Automatic Data Processing, Inc. in collaboration with Stanford Digital Economy Lab. Released monthly, typically two days before the official Nonfarm Payrolls report, it provides an early look at private sector employment changes.
The ADP report serves as a preview for the official NFP report, though its predictive accuracy varies. Significant deviations from expectations can move markets, particularly when they suggest a potential NFP surprise.
For forex traders, the ADP report offers both a standalone trading opportunity and a positioning tool ahead of the more important NFP release on Friday.
- Release schedule: First Wednesday after month end, 8:15 AM ET
- Coverage: Private sector employment only (excludes government)
- Data source: ADP payroll processing data covering ~25 million employees
- Historical data: Revised methodology introduced in 2022
What It Measures
The ADP report measures the month-over-month change in private sector employment. It counts actual payroll additions and subtractions based on ADP's payroll processing business.
Report Breakdown
- Total private payrolls: Headline number of jobs added/lost
- Small business: Companies with 1-49 employees
- Medium business: Companies with 50-499 employees
- Large business: Companies with 500+ employees
- Sector breakdown: Goods-producing vs service-providing industries
The sector breakdown can provide insights into which parts of the economy are driving job growth. Service sector growth often signals broad-based economic expansion.
Key Differences from NFP
Understanding how ADP differs from NFP helps set proper expectations:
- Private only: ADP excludes government employment (NFP includes it)
- Methodology: ADP uses actual payroll data; NFP uses surveys
- Sample size: ADP covers ~25M employees; NFP surveys ~145K businesses
- Revisions: Both reports are subject to revision
NFP Relationship
The relationship between ADP and NFP is imperfect but still valuable for traders.
Correlation Analysis
- Direction: ADP and NFP usually move in the same direction
- Magnitude: The size of changes often differs significantly
- Turning points: ADP can signal major shifts in employment trends
- Recent performance: Correlation has improved with new methodology
Do not trade NFP based solely on ADP results. The correlation is not reliable enough for directional prediction. Use ADP as one input among many.
How to Use ADP for NFP Trading
- Compare to consensus: If ADP surprises strongly, NFP expectations may shift
- Watch market reaction: Strong ADP reaction may front-run some NFP move
- Size positioning: Reduce NFP position if ADP already moved market significantly
- Sector signals: ADP sector trends may hint at NFP composition
Trading Strategies
Several approaches work for trading the ADP release.
Strategy 1: Standalone Deviation Trading
- Know consensus: Check the expected private payrolls number
- Define threshold: Typically 50K+ deviation is tradeable
- Quick execution: Enter within 30 seconds on clear surprise
- Moderate targets: Aim for 15-25 pips as a tier-2 event
Strategy 2: NFP Positioning
Use ADP to inform NFP positioning:
- Strong ADP beat: Market may be leaning bullish USD into NFP
- Weak ADP miss: Some bearish USD positioning may develop
- Adjust expectations: If ADP far from consensus, NFP expectations shift
- Contrarian opportunity: If ADP move overdone, consider fading into NFP
The best ADP trading opportunities come when the result significantly contradicts market expectations heading into NFP week. This can create positioning adjustments.
Strategy 3: Sector Analysis
Analyze sector details for additional insights:
- Goods vs services: Balance indicates broad-based growth
- Manufacturing focus: Watch if Fed focused on manufacturing employment
- Small vs large: Small business weakness may signal broader concerns
- Wage data: ADP also provides pay insights (monitor inflation implications)
Risk Management
- Position size: Use 50-75% of NFP position size
- Stop placement: 15-20 pips typically appropriate
- Take profits early: Moves can fade as market waits for NFP
- Close before NFP: Consider closing ADP positions before NFP release