The currency market is interconnected with changes observed in the economy, movements that professional Forex traders follow carefully to go alongside when it comes to making educated investing decisions. There are many tools Forex traders can make use of, from the study of the Bollinger Bands, to technical analysis and the influence of different financial indicators in currency exchange. While it is true that the daily forecast news is the main tool most trader use, advanced Forex traders find through diverse economic indicators the additional information they need to make good decisions, and improve their buying and selling strategies. One of these indicators is the Institute for Supply Management (ISM) Manufacturing Index.
Not commonly handled by novice Forex traders, the ISM Index is not as complicated as it may sound to anyone just hearing about it at the Foreign Exchange and Spread Betting investing platforms. We have already noted how Forex and economy are interlinked, so that the role of this index is merely the measurement of manufacturing output with a given time frame. What makes it easier the usage of the ISM Manufacturing Index for Forex investment planning is that such index is not the whole analysis of the economy reigning in developed countries, but an overview of large amounts of data that turns the index into an economic indicator.
Manufacturing or Currency Exchange?
As the name implies, the ISM Manufacturing Index is based on the production of diverse manufacturing parts before these are sold as goods. Technically speaking, this index can be considered a forecasting indicator because it changes before the economy actually reflects such changes. When the ISM Index drops, the economy weakens due to less manufacturing output. However, when the manufacturing output goes on the rise, the ISM Index goes up as the economy indicator it is. These upward/downward movements are equal to other economy and investment indicators that show the overall strengthening or weakening in data analysis according to their oscillation, and therefore the exchange fluctuations at the currency market side.
Understanding the ISM Manufacturing Index
The ISM Index is simply an indicator that follows the manufacturing activity in a country, measuring its performance. Calculation of this index is based on figures obtained by 300 purchasing managers across the nation, who represent 20 different industries in the USA. These managers contribute with the Institute for Supply Management taking a monthly survey about the general manufacturing activity. This information is only used to be aware of potential economy recession.
The ISM Manufacturing Index is then broken up into nine sub-indexes, but for the Forex trader only five of them are decisive:
- Employment Index
- Prices Index
- Production Index
- New Orders Index
- Supplier Deliveries Index
The first of these indexes provide employment information from a manufacturing approach, while the second is a decisive inflation trend indicator that encloses the information other indexes need. The last three indexes on the list above are mainly predictive figures of preponderant importance to determine the Price Index.
Interpretation of the ISM Manufacturing Index
Determining the ISM Index does not require specific qualifications or training, because it is as simple as understanding that whenever the ISM Index reads above 50, economy is growing or expanding, but when the index reading goes below 50, this denotes what the financial experts calls an “economic contraction“, what means that the manufacturing sector is suffering a reduction. The ISM Manufacturing Index is released once a month, usually on the first business day, and contains sensitive economy information on the indexes corresponding to the previous month.