How to Trade the German Flash Manufacturing and Services PMI: A Comprehensive Guide
Introduction
The German Flash Manufacturing and Services PMI reports provide crucial insights into the health of the manufacturing and services sectors in Germany. This guide will share the exact strategy that professional traders use to profit from market movements. By following our step-by-step guide, you’ll learn how to level the playing field and effectively trade the German Flash PMI reports.
Understanding the German Flash PMI Reports
The Flash PMI (Purchasing Managers’ Index) reports are released monthly by IHS Markit and measure the activity level of purchasing managers in the manufacturing and services sectors. These reports are based on surveys covering various industries, providing early indicators of economic conditions.
Explaining the Four PMI Categories
- German Flash Manufacturing PMI: This index measures the performance of the manufacturing sector in Germany, focusing on production, new orders, employment, supplier deliveries, and inventories. It is a key indicator of manufacturing activity and economic health.
- German Flash Services PMI: This index measures the performance of the services sector in Germany, including industries such as finance, insurance, real estate, and more. It provides insights into business activity, new orders, employment, and supplier deliveries.
- French Flash Manufacturing PMI: Similar to the German Manufacturing PMI, this index measures the performance of the manufacturing sector in France. It is an important indicator of manufacturing trends and economic conditions in France.
- French Flash Services PMI: This index measures the performance of the services sector in France, providing insights into business activity and economic trends within the services industry.
Why These PMIs Matter
- Tier One Data: The PMI reports are considered tier one economic events, meaning they have significant implications for the economies of Germany and France, as well as the broader Eurozone. Major deviations from expectations can lead to substantial market movements.
- Economic Indicator: The PMIs reflect the overall health of the manufacturing and services sectors. Rising PMI figures indicate expanding activity, which is essential for understanding economic stability and growth.
- Influencing Policy: These reports can influence the European Central Bank's (ECB) decisions, especially when they highlight trends in economic activity and health. The ECB monitors various economic indicators, including PMIs, to gauge the health of the economy and make informed decisions about monetary policy. Significant changes in PMIs can impact the ECB's stance on interest rates and other monetary measures.
- Investor Confidence: PMI data impacts investor confidence and market sentiment. Higher PMI readings suggest robust economic activity, attracting investment and boosting market confidence. Conversely, lower PMI readings may signal economic challenges and reduce investor confidence. Understanding these dynamics helps traders anticipate market reactions.
Why the German PMIs Are More Important
While the French PMIs are important, the German PMIs are more influential due to Germany’s larger economy within the Eurozone. As the largest economy in Europe, Germany’s economic health has a significant impact on the entire region, making its PMI reports more critical for market participants.
Trading Strategy for German Flash PMI Reports
Step 1: Analyze European Central Bank (ECB) Priorities
The first step is to understand what data points the ECB is currently focused on. If the ECB is focused on manufacturing and services data, then the PMI reports will have a significant amount of volatility because the ECB is in some way basing its interest rate decisions on these data releases. To quickly determine the ECB’s current focus, you can use our Professional Economic Calendar, which includes a fundamental guide. This resource helps traders stay updated on the data points that matter most to the ECB, providing a strategic advantage.
Step 2: Use High-Low Expectation Forecasts
Professional traders rely on high-low forecasts to gauge market expectations accurately. Here’s a more detailed look at why these forecasts are crucial:
- Institutional Forecasts: Professional economic calendars include high and low estimates from top institutions. This broader range of expectations offers a more comprehensive picture of potential outcomes.
- Market Shocks: When a report exceeds the high estimate or falls below the low estimate, it’s a huge shock to markets because no analyst expected it. Such deviations often result in sharp market movements.
- Lightning Bolt Feature: This tool immediately signals a deviation above the high or below the low of analyst expectations. When a deviation occurs, the lightning bolt feature alerts traders instantly, allowing them to act without delay. The quick reaction to unexpected data can be the difference between a profitable trade and a missed opportunity.
Understanding High-Low Forecasts
Economic forecasts are derived from surveys of credible institutions, each providing their best estimate on upcoming data points. Retail calendars typically present the median of these estimates, which can be misleading. The median forecast doesn’t reveal the full range of expectations and, therefore, doesn’t indicate how surprising an actual data release is compared to the extremes of analysts’ projections. In contrast, professional economic calendars include both high and low estimates. This additional information shows the analysts’ expectations at the extreme ends of their projections. Great trading opportunities arise when data releases fall outside these high and low estimates, creating market shocks that move prices significantly.
Step 3 - Choosing the Most Volatile Instrument to Trade
Using insights from institutional reports, traders can select the most responsive currency pairs. For example, if EUR/USD is particularly sensitive to economic data as outlined by the City Economic Surprise Index and the German PMI reports show a significant deviation, this pair could be an ideal target for trading.
- City Economic Surprise Index: This report identifies currency pairs that react strongly to economic surprises. It highlights pairs that are sensitive to data deviations, helping traders focus on the most responsive markets.
- Risk-Reversal Report: This report shows market positioning, revealing a buildup of call or put options on certain currency pairs. Understanding these positions helps traders choose a pair that may have orders susceptible to getting liquidated upon the release of an economic data point.
- CFTC Report: This report details hedge funds' positions; if a lot of big players are long the EUR/USD but then data comes out in favor of the USD, some of those funds might have to unwind their positions leading to an outsized move. Good thing you didn’t trade the GBP/EUR.
Trade Execution Steps
- Confirm ECB Focus: Ensure the European Central Bank is currently emphasizing manufacturing and services data. If these sectors are a primary focus, the German PMI reports will have a higher likelihood of moving the market. Remember, if the central bank is focused on the data point, it’s because they are using that data point to make a decision on rates. This is the reason data points that are focused on cause volatility.
- Check Forecast Ranges: Before the data release, review the high and low forecast expectations for the event. Plan to trade only if the actual data significantly exceeds the high estimate or falls below the low estimate. This strategy ensures you act on genuinely surprising data and there will most likely be a follow-through reaction.
- Monitor Revisions: Check for any conflicting revisions in the data, as these can alter the initial market reaction. Make sure the primary release and any revisions align to support your trade.
- Enter Trade Promptly: Once you confirm the deviation, act quickly to enter your trade. Enter within the first 30 seconds. Speed is crucial, as market reactions to significant data surprises happen rapidly.
- Set Stop and Take Profit:
- Stop-Loss: Place your stop-loss below the low of the initial spike candle to protect against adverse movements.
- Take Profit: Aim for 30-100 pips for tier one events like the German PMI reports, adjusting based on market conditions and volatility. (Note: For tier two events, aim for 15-30 pips.)
Managing the Trade
- After the Initial Run: Look for a shallow pullback around a 23% Fibonacci retracement or near support/resistance levels. This initial pullback can provide an opportunity to enter the trade again after you’ve taken a few points off the table after your first entry.
- Break Even: Move your stop-loss to break even as soon as possible to protect your gains. The stronger the release, the shallower the pullback. Moving to break even is essential because the market should want to buy off your S&R level and continue to the highs of the one-minute candle and break. If that doesn’t happen, something could be off.
- Reentries: If your initial position is stopped out at break even, consider reentering at deeper retracements, such as the 38% or 50% Fibonacci levels. Use nearby support and resistance levels to guide your reentry points.
Conclusion
While the German Flash Manufacturing and Services PMI reports may not always lead to significant market movements, understanding their nuances and using a professional trading strategy can help you capitalize on unexpected deviations. If you don’t have the tools mentioned above, try out our Professional Economic Calendar Package and use institutional tools to level the playing field. By following these steps, you’ll be well-prepared to trade the German PMI reports effectively, leveraging the same strategies that professional traders use to profit from this economic data release.