ISM (Institute of Supply Managers Index) Definition

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Video Transcription:

Hello traders. Welcome to the news trading course and the third module in news that move the market preferably enough for us to trade. In this lesson, we’re going to go through the ISM manufacturing and non-manufacturing PMI and what you need to understand is that this index is not released by any government entity but it’s released by the Institute of Supply Managers.

ISM Definition

Now we’re going to start by defining what this index is. The Institute of Supply Managers releases an index based on more than 400 purchasing and supply manager service, both in the manufacturing and non-manufacturing industries. This means that we have two indexes that are released, the ISM non-manufacturing PMI and the ISM manufacturing PMI. The ISM non-manufacturing PMI records the data from these purchasing and supply executive on the non-manufacturing industries or sectors and the manufacturing PMI of course records the data of these purchasing and supply executives only on the manufacturing sectors.

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We have two numbers that are being released by the Institute of Supply Managers. These executives are surveyed about employment, production, new orders, prices, supplier deliveries and inventories. This is what this index is built on. How are we going to interpret these numbers? Purchasing and supply managers hold the most current and relevant insight into the companies’ view of the economy. And why is that? This is simple because this index calculates the level of commitment these companies have, because the more they purchase, the more they produce, the more they employ. If a company has a bad view on the economy, it’s going to cut its supply thus its production and thus its level of employment and its overall level of commitment to this country’s economy. This is why these numbers are very important and are very closely watched by traders.

A higher than expected or last month’s reading is good for the currency whereas a low reading is not. Now, when the index is increasing, investors can assume that the stock market should be increasing too because of higher corporate profits due to larger commitments with its production. This is very logical and it’s what we’ve been talking about. This is why this index is very closely watched and this is why it brings a lot of volume when it’s released. The ISM non-manufacturing PMI gets more attention than its counterpart because it serves a larger portion of the economy and this is quite logical because the ISM non-manufacturing PMI services the overall service sector.

Now how are we going to trade this release? First of all, we are never going to front run it because we don’t front revenues. The ISM index release will bring heavy volume into the market, and we can expect moves up to 100 pips in currency pairs. So we’re going to watch it very closely and when it comes to the US, the United States, we are going to trade it with the US dollar. We’re going to use this financial instrument to trade this release of course. Since this is a rather straightforward release, we are going to use planning orders to trade it, but because of its large moves, we are also going to trade corrections and consolidations when they appear. So this is basically what the ISM non-manufacturing and manufacturing PMI are and as you can see, it’s very straightforward and when the release of this index happens, it is scheduled to only be released by itself so we are going to use penny orders to trade it.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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