PMI is a very popular and extremely important economic concept for traders. PMI provides an overview of the economic situation of a business. Even for an entire country, helping them make economic decisions accurately and effectively. So what is PMI? Instructions on how to calculate the purchasing managers index accurately? Let’s explore the answer to Forex Trading along with effective trading strategies through the following article!
Information you need to know before learning how to calculate purchasing managers’ index
PMI, abbreviated from Purchasing Managers Index in English. This is a financial index that measures the performance of a productive economy. It is usually published by ISM (Institute for Supply Management). Businesses often use PMI to plan their annual budget. At the same time, it also manages human resources and forecasts cash flow…
What is PMI?
PMI, or Purchasing Managers Index in English, is a purchasing managers index. It is compiled and published monthly by the Institute for Supply Management (ISM) and Markit Group. This index measures the economic performance of the manufacturing industry.
A survey was sent to senior executives of more than 400 companies in 19 major industries to calculate the PMI.
PMI includes factors such as new orders, output, employment, delivery times, and inventories. This is an important measure of a country’s economic performance. It allows businesses to evaluate their own growth rate as well as that of the whole country. Management can use PMI to capture important information related to the business’s current business conditions and operations.
PMI also has a great impact on businesses’ purchasing management decisions. In addition, it also affects suppliers. Because it provides data that helps them predict market needs.
The role and meaning of the PMI index in forex technical analysis
Meaning of PMI index:
- The PMI index is an extremely important measure of a country’s economy. To help the State Bank and the Government come up with appropriate monetary policies.
- Businesses can evaluate their own and the country’s growth rate. The purpose is to be able to adjust investments.
- Influencing purchasing management decisions, providing data for inventory management and pricing decisions.
- Impact on suppliers, help predict and adjust prices for the most benefit.
The role of PMI index:
- Decision support of manufacturers and order managers/purchasing departments in production decisions. Or even the stage of purchasing input materials.
- Estimate future product demand and supplier inventory.
- Affects product prices and input material costs. To help businesses adjust their business strategies.
- Support annual budget planning and human resource management. At the same time, it is possible to forecast the cash flow of the business.
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How to do forex technical analysis with 2 main types of PMI
There are two common types of PMI, including Manufacturing PMI and Non-Manufacturing PMI:
Manufacturing PMI reflects the state of activity in the manufacturing industry. Made through the following key factors and corresponding weights:
- New orders: 30%
- Production: 25%
- Delivery from supplier: 15%
- Inventory: 10%
- Employment: 20%
Non-Manufacturing PMI or Services PMI, similarly, measures activity in non-manufacturing sectors. Key factors include:
- Business activities
- New orders
- Job
- Delivery from supplier
- Weights can be adjusted according to seasonality.
Trading strategy with PMI index
From the PMI index, we can understand where the economic situation is. This is especially important for leaders and administrators. To help them identify things that need to be adjusted. Here’s how to calculate the purchasing managers index and how to use it in technical analysis:
How to calculate the PMI index quickly and accurately
To calculate PMI, we use the following formula:
PMI = (P1 x 1) + (P2 x 0.5) + (P3 x 0)
In there:
- P1 is the percentage of responses for “improved” economic performance.
- P2 is the percentage of responses for “unchanged” economic activity.
- P3 is the percentage of responses for “declining” economic activity.
How to read PMI in technical analysis
The PMI index is calculated based on responses from 400 manufacturers nationwide. With values ranging from 0 to 100. The 50 mark is often used as a standard for analysis.
- When the result is greater than 50 (> 50), it means the market is in a growth phase.
- When the result is less than 50 (< 50), it means the market is falling.
- When the result is equal to 50 (= 50), it means the market is in equilibrium.
However, this number is only an initial forecast. Businesses need to consider the following 3 cases:
- If the actual PMI is higher than the forecast, it is a sign of positive developments in the economy. This can lead to an increase in the value of that country’s domestic currency. At the same time, increasing positive responses from manufacturing and service industries.
- If the actual PMI is lower than the forecast, it is a sign of a slowdown in the economy. This causes concerns for investors in investing capital.
- If the actual PMI is equal to the forecast, the market is usually stable and does not have significant fluctuations.
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How does calculating the PMI index affect traders?
The PMI index is published depending on each company and each country. Investors can access PMI data through financial websites. For example, investing.com, pmi.spglobal.com, tradingeconomics… or through information in other media. In addition, they can also search for How to calculate RSI to apply in technical analysis.
Looking at how the PMI index is calculated, investors can evaluate economic conditions. It could be the whole business or the country. They can detect increases and decreases in the number of new orders. Manufacturers’ adjustments in output, input costs, inflation pressures, and many other factors.
If the production and business situation fluctuates negatively, investors need to be careful. You should choose safe investment channels or diversify your portfolio to minimize risks. On the contrary, if production and business develop well, investors should take advantage of this opportunity by investing capital. Especially in assets with high-profit potential like stocks.
Conclude:
Above, Forex Trading has provided readers with information about How to calculate the purchasing managers index and the meaningful role of this index in investing. It can be said that the PMI index partly reflects the health of the economy. This helps administrators and leaders have an overview of the domestic economic situation compared to the international situation. From there, measures can be applied to improve and increase economic growth. Hopefully, the above information will be more useful to you. Good luck!
Frequently asked questions:
How to use PMI data to evaluate and forecast currency pair trends?
Traders can choose a trading strategy through using PMI data to evaluate the economic health of a country. Increase the ability to forecast the trend of currency pairs. For example, a higher-than-expected PMI could suggest that the economy is growing strongly. This can lead to an increase in the value of the currency.
How does PMI affect the value of currencies?
PMI can influence the value of currencies because it provides information about a country’s economic performance. Traders will often evaluate a country’s PMI relative to other countries. Aims to determine the growth and stability potential of the currency.
Is there a way to trade forex based on PMI data?
There are possible forex trading strategies based on PMI data, including trading the news or using long-term trend-based strategies.
