I have come accross this chart in MT4 and understand it shows the overall strength of the USD. I think it’s the Dow Jones index. As 50% of the index is comprised of the EURO this chart has a near perfect negative correlation to the EURUSD.
Well when trading the major pairs, sure the trend of each pair is useful. But shouldn’t the USDOLLAR index chart trend and sup res be the first thing we look at?
USD/X pairs have strong possitive correlation to the USD index and X/USD pairs have strong negative correlation.
So would it not be wise to base all trading off of this chart? When the USD Index is at support perhaps see what major chart is also at support and go long…
Even why not even trade the index chart itself? IT must be the purest chart of them all.
Am i missing something here? If all majors and most of Forex goes via USD then shouldn’t this Index chart be the most traded of them all by retail?
Why bother trying to figure out if the Euro or GBP is strong/weak against the USD when you can just do your analysis on the Dollar index and trade how strong/weak the USD is on it’s own.
You are referring to two distinct indices for the US Dollar:
[B]USDX [/B](the ICE Dollar Index) is traded in the futures market through the Intercontinental Exchange (ICE). It’s components are as follows:
[ul]
[li]Euro (EUR), 57.6% weight
[/li][li]Japanese yen (JPY) 13.6% weight
[/li][li]Pound sterling (GBP), 11.9% weight
[/li][li]Canadian dollar (CAD), 9.1% weight
[/li][li]Swedish krona (SEK), 4.2% weight
[/li][li]Swiss franc (CHF) 3.6% weight
[/li][/ul]
[B]USDOLLAR [/B](the Dow Jones-FXCM Dollar Index) is traded in the spot market through FXCM. It’s components are as follows:
[ul]
[li]Euro (EUR), 25% weight
[/li][li]Japanese yen (JPY), 25% weight
[/li][li]Pound sterling (GBP), 25% weight
[/li][li]Australian dollar (AUD), 25% weight
[/li][/ul]
You raise a good point that dollar indices can be used to analyze and/or make trades based on your view of the dollar alone, and that is how traders use dollar indices.
You’ve got a good point right here! It’s helpful to look at the dollar index to see how the major pairs react to US data but you also have to remember that each counter currency has fundamentals of its own driving price action. So if the dollar is strengthening but say, the pound is also strengthening, GBPUSD could just wind up consolidating.
Using USD index chart for trade analysis is a very old technique. I knew a trader some years ago who used USD index chart to buy or sell USD/xxx pairs. The problem is that you may end up risking too much on one side while trading in such manner.
yeahh agree with pip diddy, analysis of the dollar would surely help to see how other pairs will react to the US data but the thing is its not applicable always, sometimes dollar index will be strengthening while USDJPY will also be strengthening, that is because the major is reacting to its own fundamentals like whats going in the Japanese economy.