US Dollar Index (USDX) for Forex Trading
Good Morning Traders,
One of the reasons retail traders are unsuccessful in many of their trades is the fact that they do not pay attention to what is happening in the US Dollar Index.
When trading currencies, one quickly realizes that the US Dollar Index is the currency index that dictates the price fluctuations in the market environment.
This week we would like to present to you with the US Dollar Index, and the importance of the US dollar index in the FX world.
First things first:
US DOLLAR INDEX?
The US Dollar Index (USDX, DXY) is a Dollar Index(or measure) of the value of the United States Dollar Index relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners‘ currencies.
The Dollar Index is currently designed, maintained and published by the commodity exchange ICE Futures U.S. Inc., with the name “U.S. Dollar Index” a registered trademark.
US Dollar Index is a weighted geometric mean of the dollar’s value relative to other selected currencies:
Euro (EUR), 57.6% weight
Japanese Yen (JPY) 13.6% weight
Pound Sterling (GBP), 11.9% weight
Canadian Dollar (CAD), 9.1% weight
Swedish Krona (SEK), 4.2% weight
Swiss Franc (CHF) 3.6% weight
US DOLLAR INDEX MEAN FOR TRADERS/INVESTORS?
US Dollar Index (USDX) goes up when the U.S. dollar gains “strength” (value) when compared to other currencies.
There will some who already argue this is likely to be revised in the future as Switzerland and Sweden have become a bit less important in the world scenario and countries like China and Brazil won’t have their currencies included in the dollar Index calculation. But let’s leave that for when it happens if it happens at all.
HOW CAN WE TAKE ADVANTAGE TO TRADE THE US DOLLAR INDEX?
Once we know the Dollar Index reflects the value of the US Dollar against a basket of currencies, we can use it as an extra confirmation before entering a trade. As an example, the EURO, which is weighted at almost 60% against the US Dollar, can be matched to the US Dollar Index for confirmation of entries in the EUR/USD, if we have confluences of support and resistance between the charts of the 2 mentioned markets.
DOLLAR INDEX WEEKLY VIEW
From the Daily chart below we can clearly see the Dollar Index is in a downtrend. The long-term momentum is still Bearish for this market. We have an opportunity to join the flow here and short this market matching the resistance levels with a major pair like the EUR/USD, USD/CHF, and GBP/USD.
The first option is the levels market which is the confluence of previous support becoming resistance, the 61.8% fib pullback of the swing high to low with an anticipation of a 5th touch of the descending trending line. Platinum Traders will be waiting for that pullback to complete and match these levels with levels on the mentioned currency pairs to enter their trades at the perfect prices.
There are more than enough confluences in our favor on this setup. Fundamentally the US Dollar Index is still Bearish and this pullback is just the market pricing the FED rate hike in December. We may have here a classic example of the “buy the rumors, sell the news” trade.
We have also outlined the various major supply and demand areas on the US Dollar Index chart which you should place alerts on.
US DOLLAR INDEX CHART:
HOW TO TRADE THE US DOLLAR INDEX:
A) Match the levels outlined on this chart with important levels in the EUR/USD, US, CHF and GBP/USD, and trade the US Dollar Index accordingly.
If you have any questions on the trade setups on Dollar Index, please contact the Platinum team and we will be happy to assist you on US Dollar Index.
KEY TECHNICAL LEVELS ON THE DOLLAR INDEX:
- 85 – Long-Term Selling level
- 75 – Short-Term Selling Level
- 9890 – Long-Term Selling Level – Platinum’s Premium Fib level
- 9740 – Long-Term Selling Level
- 9585 – Long-Term Selling Level
- 9260 – Short-Term Buying Level
- 9100 – Medium-Term Buying Level
THE EURO TRADE EXAMPLE:
Platinum Traders will be watching the EUR/USD and looking to match the levels of the charts below with the chart of the US Dollar Index.
WEEKLY VIEW FOR EURO:
From the Daily chart below, we can see the EUR/USD has taken a small break from its uptrend momentum and it is working on a deeper correction. We may have an opportunity to join the most recent correction and short the pair on a pullback to 1.1880.
As Platinum traders, we trade the markets up and down to make money and despite this short-term momentum, we will really focus on joining the main force in this market since the beginning of 2017 and Long EUR/USD @ 1.1605 aiming for 400 pips run back into the 1.20 levels.
The ECB has a hard job is its hands. They need to taper QE and that process could push the euro even higher. The ECB cannot get a consensus among its members on when they will stop assets buying (QE) or at least reduce from the current €60 billion to €40 billion or even €20 billion a month with yet another extension of 6 to 9 months. While other Central Banks have already started to increase rates arguing that the time of free money is over and the QE programmes and stimulus have done their job, ECB needs to cut its stimulus all together before thinking of any hikes in its rates.
So far interest rates have no forecast to be raised by the ECB until QE ends and that is widely agreed by policymakers. No change in the picture of the Euro upwards move in the charts and any change is likely to send the Euro even higher, therefore, we have good reason to be Euro buyers for time being.
We have also outlined the various major supply and demand areas on the chart which you should place alerts on.
How to trade EUR/USD:
A) Long the EUR/USD @ 1.1605 or the nearest zone with 40 pips stop loss and a target of 1.2000
B) Trade the trap range with 30 pips stop loss and aim for 50 pips
If you have any questions on the trade setups, please contact the Platinum team and we will be happy to assist you.
KEY TECHNICAL LEVELS ON THE EUR/USD:
- 2090 – Short-Term Selling level
- 1880 – Medium-Term Selling Level
- 1720 – Short-Term Buying Level
- 1605 – Long-Term Buying Level
- 1495 – Long-Term Buying Level – Platinum’s Premium Fib level
- 1350 – Short-Term Buying Level
- 1125 – Long-Term Buying Level
THE PERFECT TRADE SET UP:
Once you have understood the correlation between the US Dollar Index and the EURO in this example, all you need to do is match the levels of the 2 markets and go for the trade. A level Platinum Traders will definitely be looking forward to coming into play will be the confluence of the 0.9585 in the DXY, and the 1.1495 on the EUR/USD. This would be ideal to hold the trade for long-term profits.
If you would like to know why this would be the case, get in touch with the Platinum Team today, and we will be happy to help and explain the trade.
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Hopefully, you have enjoyed today’s article and have gained great knowledge about trading and how to trade US Dollar Index.
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Hopefully, you have enjoyed today’s article. Thanks for reading!
Have a fantastic day!
Live from the Platinum Trading Floor.