Fundamental

Purchase Manager Index (PMI) and Forex Trading Strategy

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The Purchase Manager Index (PMI) is data that shows economic activity and the possibility of future economic development from the perspective of business sectors. PMI is one of the data that is highly considered, because PMI is often referred as an “alarm” or the first clue to the economic condition of a country whether developing and growing or starting to shrink and lead to recession or crisis.

PMI is conducted by various parties, both government and private. Usually, the name of the institution will be mentioned in the release of PMI reports, such as PMI Nikkei, PMI Caixin, HSBC PMI and so on to distinguish which reports are from private parties and which are reports from the government.

List of PMI Releases

PMI data is usually collected from managers from medium to large scale companies, and those who will release the data will give questions to managers. The question group is usually divided into two, the present and the future. The manager will be asked how the possibility of sales, hiring, production, business expectations going forward and so on. All of the data is asked in questionnaires or interviews by telephone, before being processed and published to the general public.

In this index, the value is in the form of percent where 50 is the boundary between optimism and pessimism, or between business expansion and contraction of business. A value below 50 means that most managers are pessimistic about the state of the economy and even plan to reduce production or close production. Conversely, a value above 50 is a sign that the economy will still grow so that managers dare to expand their businesses or increase their production.

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What is the relationship between PMI and Forex trading?

As already stated, PMI is one indicator measuring the health of a business entity or company in a country. In general, a good PMI reflects good economic conditions, so there is a possibility that foreign capital will flow in and strengthen the local currency exchange rate.

Conversely, if the PMI turns out to be less good it means that there is a possibility that the economy of a country is on the edge of a recession or even has recession. Investors certainly do not like countries that are having problems with economic growth and can just pull their capital out of the country and make the local currency fall in value.

However, it does not all occur automatically depending on how fast the PMI value rises or falls. The more drastic the changes, the more drastic the exchange rate changes. In the forex market, PMI is included in leading data which means it can provide fundamentals in advance of a country’s economic situation.

The impact of the PMI on the USD / JPY Movement

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How to trade Forex using PMI data?

PMI is continuous data and has clear limits, which is number 50. PMI from types of businesses such as Manufacturing PMI and Service PMI are the most awaited by market participants. In certain countries, where the service sector is more dominant in its economic structure, the Services PMI is awaited release.

The following forex trading tips when news releases PMI will occur:

  1. Make sure that the PMI to be released has seen previous data, whether in an up or down trend.
  2. The long-awaited PMI is usually the Services PMI, but it does not rule out other PMIs can also affect currency movements.
  3. After noticing the trends of the PMI, wait for the latest PMI data to be released and see the results.
  4. Never try to trade speculation before a release occurs. Remember, trading using fundamentals is not trading waiting for news releases.
  5. If the results of the release continue the previous trend, we can order entry in the same direction as the current trend.
  6. If the release shows that there is a change in trend, then we can enter in the opposite direction from the trend.
  7. Always set Stop Loss (SL) because unexpected things can happen even though we have done a good analysis.

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Does Trading PMI Data Always Make Profit?

The opportunity to get profit is always there, but it is not certain that it will always be profitable. Many factors affect the movement of a currency pair’s price apart from just one news. For this reason, always set a Stop Loss (SL) in every time you enter an order.

Warning

Fundamental trading is not trading waiting for news to be released and “trapping”. Fundamental trading is reading data and summarizing the possibility of price movements of a currency pair through trends or trends seen in the data that has been released.

Trapping trading is not recommended because the risk to be accepted is large. Spreads can widen for those brokers who do not set fixed spreads. Or for brokers with fixed spreads, there will be many restrictions about this trade.

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