How to Trade the US ISM Services PMI: A Comprehensive Guide

Introduction

The US ISM Services PMI (Purchasing Managers’ Index) provides valuable insights into the non-manufacturing sector, covering industries such as finance, insurance, real estate, and more.
This guide will share the exact strategy that professional traders use to take money from the 95% of losing retail traders. By following our step-by-step guide, you’ll learn how to level the playing field and effectively trade the ISM Services PMI report.

Understanding the US ISM Services PMI

The ISM Services PMI, released monthly by the Institute for Supply Management (ISM), measures the economic health of the service sector. It includes data on business activity, new orders, employment, and supplier deliveries. As a forward-looking indicator, it provides a glimpse into future economic activity and trends in the service sector.

Why ISM Services PMI Matters

Why ISM Services PMI Often Won’t Move the Market

Trading Strategy for ISM Services PMI

Step 1: Analyze Federal Reserve Priorities

The first step is to understand what data points the Federal Reserve is currently focused on. If the Fed is focused on the service sector, then the ISM Services PMI will have significant volatility because the Fed may base its interest rate decisions on this data release.

To quickly determine the Fed’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 Fed, 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:

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 USD/JPY is particularly sensitive to economic data as outlined by the City Economic Surprise Index and the ISM Services PMI shows a significant deviation, this pair could be an ideal target for trading.

Trading Strategy for ISM Services PMI

Confirm Fed Focus

Ensure the Federal Reserve is currently emphasizing service sector data. If the service sector is a primary focus, the ISM Services PMI 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. Sometimes the central bank is focused on a data point inside a data point. Like the Federal Reserve has often called out average hourly earnings as the key thing they are looking for inside the Non-Farm Payroll report.

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

Using insights from institutional reports, traders can select the most responsive currency pairs. For example, if USD/JPY is particularly sensitive to economic data as outlined by the City Economic Surprise Index and the ISM Services PMI shows a significant deviation, this pair could be an ideal target for trading.

Managing the Trade

Conclusion

While the US ISM Services PMI report may not always lead to significant market movements, understanding its 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 ISM Services PMI report effectively, leveraging the same strategies that professional traders use to profit from this economic data release.

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