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How Forex Traders Can Use The PMI To Their Advantage

Purchasing Managers IndexThere’s a lot of news in recent times circulating about PMI and its influence on the forex market.

However, if you are new to the world of forex or just reading through, you might not understand what the fuss is all about. PMI refers to the “Purchasing Managers Index” and is one of the most important pieces of economic news that has a lot of influence on financial markets.

PMI is very important for forex traders irrespective of their approach to the market.

PMI: Explained

PMI is an important indicator of economic growth and can influence a trader’s strategy greatly. PMI is a survey that is done monthly where over four hundred purchasing managers are asked to rate the current situation of their company and several areas of the company’s evolution. This includes employment, new orders, deliveries, and inventories.

There are only three choices for each category. Better than last month, similar to last month and worse than last month. The answers are then compiled into a single release as the PMI. The results of the survey are focused on the fifty level and can be a good sign on the health of the economy. If the PMI drops below fifty, then people should be brace for a recession. If it crosses the fifty level, then things are good and one can prepare for an expansion.

Leveraging PMI Results

Forex traders like to look at the PMI and base their buy or sell decisions on what it reveals. However, it is not just about selling when an expansion is expected and buying when a recession is on the cards. There are quite a few details that need to be worked out when looking at the PMI results.

For example, the Gross Domestic Product (GDP) is a good way to measure the strength of an economy. However, the GDP is not just one part of the economy. Manufacturing and services are just two parts of the GDP, though they are prominent. PMI comes out in two parts. One is for the services sector, and the other is for the manufacturing sector. When it comes to forex trading, PMI services have more weight.

For example, when PMI Manufacturing is low, most currencies drop. But when PMI Services are released and it shows strong results, most currencies manage to rebound. Overall, PMI is an important piece of data similar to info on jobs and inflation. Forex traders should watch regularly for its monthly release and make their trading decisions based on the info it brings, with emphasis on where it is on the 50 mark and what sector the PMI is referring to.

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