What is your market sentiment on the US Dollar (USD)? Is it gaining strength or getting weak? US Dollar Index measures the strength of USD against a basket of currencies. This basket of currencies comprises the EURO (57.6%), Japanese Yen (13.6%), British Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%) and Swiss Franc (3.6%).
US Dollar Index symbol is $DXY and is popularly known as the Dixie. US Dollar Index Futures contracts get traded on the ICE Futures Exchange formerly the New York Board of Trade (NYBOT). One thing you must have observed is that this index is heavily weighted against the EURO. This is due to the fact that before the EURO inception, this index contained the French Franc, the German Mark, Italian Lira and other European currencies. But when EURO came into existence as the single currency of the EMU in 1999, it replaced all the above currencies. Hence, the heavy tilt against this single currency.
How can you use USDX in forex trading? Pro traders use USDX in diversifying their spot USD trades. Now, as said above, USDX is heavily tilted in favor of the EURO more than 50%. It is often used to trade EUR/USD. Both the EUR/USD and the USDX move in opposite direction. When EUR/USD rises, USDX falls. You should know this fact.
How to use the USDX in confirming a EUR/USD trade setup? Suppose, EUR/USD pair is hitting support on the 4 hour chart! You check the USDX 4 hour chart, it should be hitting resistance. Both the charts move in opposite direction. You check on the daily chart, EUR/USD is in an uptrend. This is a good trade confirmation that you can go long on EUR/USD.
Let's take another situation where the US Dollar Index tells you not to enter into a EUR/USD trade. Suppose, EUR/USD pair is on a verge of a breakout on the daily chart! A nice, head and shoulder pattern is being formed on the EUR/USD chart. EUR/USD is on a long term uptrend. So, you expect a downtrend to breakout now. This means bulls for the USD.
You check with the USDX chart. It is also forming a head and shoulder pattern meaning a downtrend on USDX. But a downtrend on EUR/USD pair means a bullish USD while a downtrend on the USDX means a bearish USD.
Now, EUR/USD chart is giving a bullish outlook on USD while the USDX chart is giving a bearish outlook on USD. Both these signals are not confirming each other. So, stay out of a EUR/USD short trade.
US Dollar Index symbol is $DXY and is popularly known as the Dixie. US Dollar Index Futures contracts get traded on the ICE Futures Exchange formerly the New York Board of Trade (NYBOT). One thing you must have observed is that this index is heavily weighted against the EURO. This is due to the fact that before the EURO inception, this index contained the French Franc, the German Mark, Italian Lira and other European currencies. But when EURO came into existence as the single currency of the EMU in 1999, it replaced all the above currencies. Hence, the heavy tilt against this single currency.
How can you use USDX in forex trading? Pro traders use USDX in diversifying their spot USD trades. Now, as said above, USDX is heavily tilted in favor of the EURO more than 50%. It is often used to trade EUR/USD. Both the EUR/USD and the USDX move in opposite direction. When EUR/USD rises, USDX falls. You should know this fact.
How to use the USDX in confirming a EUR/USD trade setup? Suppose, EUR/USD pair is hitting support on the 4 hour chart! You check the USDX 4 hour chart, it should be hitting resistance. Both the charts move in opposite direction. You check on the daily chart, EUR/USD is in an uptrend. This is a good trade confirmation that you can go long on EUR/USD.
Let's take another situation where the US Dollar Index tells you not to enter into a EUR/USD trade. Suppose, EUR/USD pair is on a verge of a breakout on the daily chart! A nice, head and shoulder pattern is being formed on the EUR/USD chart. EUR/USD is on a long term uptrend. So, you expect a downtrend to breakout now. This means bulls for the USD.
You check with the USDX chart. It is also forming a head and shoulder pattern meaning a downtrend on USDX. But a downtrend on EUR/USD pair means a bullish USD while a downtrend on the USDX means a bearish USD.
Now, EUR/USD chart is giving a bullish outlook on USD while the USDX chart is giving a bearish outlook on USD. Both these signals are not confirming each other. So, stay out of a EUR/USD short trade.
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