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What is PMI index? What traders need to know

PMI is one of the important economic indicators that traders should monitor to evaluate the economic situation of a country or region. PMI index affects the value of currencies, bond yields, and the stock market. This article, Learn Forex Trading will give you an overview of the PMI index, how to calculate it, how to read it, and how to use it in forex trading.

Overview of information traders need to know about the PMI index

To take advantage of the PMI index to trade effectively in the market. Investors in the forex market need to clearly understand the following basic information.

What is the PMI index?

PMI (Purchasing Managers’ Index) is also known as purchasing management index. This is an index that measures the level of manufacturing and service sector activity in a country or region. PMI is calculated based on monthly surveys sent to purchasing managers in manufacturing and service companies.

PMI index is compiled and published by two main organizations: the Institute of Supply Management (ISM) of the US and the Markit Group of the UK. ISM releases PMIs for the US and 18 other countries. While Markit Group releases PMIs for more than 30 countries and regions.

PMI is usually expressed as a number between 0 and 100. A PMI index greater than 50 indicates expansion in the manufacturing and services sector, while an index less than 50 indicates a recession. A PMI of 50 indicates stability or no volatility.

See more: Know by heart all knowledge about the CPI index

What is the meaning of the PMI index?

PMI index is a leading, trending index that precedes the fluctuations of other economic indicators. It can be mentioned as GDP, industrial production, or employment situation.

PMI influences the value of a country or region’s currency, bond yields, and stock markets. A high PMI indicates economic growth. Thereby creating higher demand for the currency, increasing its value compared to other currencies.

PMI index also affects bond yields and the stock market. A high PMI indicates economic growth, raising expectations about inflation and interest rates. Thereby, reducing the value of bonds and their yields.

The stock market often reflects the economic outlook of a country or region. A high PMI indicates economic growth. That is, increasing the profits of companies, and increasing their stock prices.

The role of PMI index

PMI plays an important role in supporting managers and investors. Aims for analysts to assess the current economic situation and forecast the future. PMI provides them with detailed information about the factors affecting the business performance of manufacturing and service companies.

This index also helps them identify trends, challenges, and opportunities in the economy. Thereby, helping them plan, analyze, and invest effectively.

Popular types of PMI index

There are many different types of PMI indexes. Depending on the industry, country, or region they measure. Some of the most common PMIs are:

Manufacturing PMI. Measures the level of manufacturing activity in a country or region. This index is calculated based on surveys of purchasing managers in manufacturing companies.
Service PMI. Measures the level of service industry activity in a country or region. This index is calculated based on surveys of purchasing managers in service companies.
Composite PMI. Measures the level of activity of both manufacturing and service industries in a country or region. This index is calculated based on the weight of manufacturing PMI and service PMI.

How to calculate the PMI index

PMI is calculated based on monthly surveys sent to purchasing managers in manufacturing and service companies. These surveys ask questions about current and expected future business conditions. Includes factors such as new orders, output, employment, prices, deliveries from suppliers, and inventory.

The formula to calculate the PMI index is:

PMI = (P1 * 1) + (P2 * 0.5) + (P3 * 0)

In there:

P1 is the percentage of responses reporting improvement.
P2 is the percentage of responses reporting no change.
P3 is the percentage of responses reporting a decline.

For example, if in a month, 40% of purchasing managers reported improvement, 40% reported no change, and 20% reported decline, then the PMI would be:

PMI = (40 * 1) + (40 * 0.5) + (20 * 0) = 60

This shows that the manufacturing and service industries are expanding strongly.

The easiest way to read the PMI index

PMI is a leading indicator. Traders need to take advantage and know how to read the basics to trade effectively.

How to read the economic calendar in general

The economic calendar is a useful tool for traders to track important economic events around the world. Including the PMI index. Economic calendars often include the following information:

Event name.
Announcement time.
Influence level.
Forecast.
Previous results.
Actual results.

The way to read the PMI index according to the economic calendar is generally a comparison between actual results and forecasts. Just like the previous results, to identify trends and fluctuations in PMI. If actual results are higher than forecasts and previous results. This shows improvement in the manufacturing and service sectors, and vice versa.

How to read indicators according to the economic calendar

How to read for forex index traders

In addition to reading according to the general economic calendar. Forex index traders can also use technical indicators to support analysis and make trading decisions. Some popular and effective indicators that traders should know:

Moving average MA line. This is a moving average line that represents the average value of price over a certain period.
Relative Strength RSI Index. This is an indicator that measures the strength of the trend and the overbought or oversold level of the market.
Stochastic index. This is an indicator that measures market volatility and whether the market is overbought or oversold. The Stochastic index is represented by two lines, the %K line, and the %D line.
Moving Average Convergence Divergence (MACD) index. This is an indicator represented by two lines, the MACD line and the signal line.
How to read for forex trading

See more: Opening and verifying an ICMarkets account

Effective strategies for following the PMI index

After understanding how to read this forex indicator. Traders can apply some effective PMI trading strategies as follows:

Trading strategy according to expectations. This is a strategy based on the difference between the actual results and the forecast of the PMI index. If actual results are higher than forecasts, this indicates improvement in the manufacturing and service sectors. Shows that traders can buy the currency of that country or region.
Trading strategy based on technical indicators. This is a strategy that combines PMI and technical indicators to determine optimal entry and exit points. Traders can use technical indicators to determine market trends, strength, volatility, and support and resistance points.
In addition, traders need to combine it with other important financial indicators. These include the SP500 index, Nikkei index, NASDAQ,…
Trading strategy with PMI

The article on Learn Forex Trading introduced you to the PMI index. This is an important economic indicator that traders should monitor to evaluate the economic situation of a country or region. Hopefully, the above content can help traders have effective trading plans in the market.