US Dollar Index And The EURUSD Currency Pair
As a forex trader, have you ever used the US Dollar Index in your trading? Many traders don't know how to use it in their trading. Read this article to find out how you can use it to trade some of the most heavily traded currency pairs in the market. Don't know anything about the US Dollar Index? Well, US Dollar Index is a basket of currencies that is used to measure the strength of the US Dollar (USD). The basket that is used to measure the strength of US Dollar comprises of EURO (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swedish Krona (SEK) and the Swiss Franc (CHF). Their respective waits are EUR 57.6 Percent, JPY 13.6 Percent, GBP 11.9%, CAD 9.1 Percent, SEK 4.2 Percent and CHF 3.6 Percent. You must have observed that the heaviest weight goes to EUR.
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.
So, how can we use the USDX in trading EUR/USD pair, the most popular pair amongst the forex traders. Suppose, you find EUR/USD in a downtrend on the intraday chart like the 60 minutes chart. EUR/USD pair is hitting resistance on the 60 minutes chart. You check up on the USDX chart. The USDX is in an uptrend. Remember, both move in the opposite directions. USDX is hitting support. This is a good confirmation that you can enter into a short trade.
In the above example, USDX confirmed your trading signal on EUR/USD. Suppose, EUR/USD chart shows the price action about to break out in a new direction. You find a head and shoulder chart pattern forming on the EUR/USD intraday chart. The trend is up! This means a new trend in the down direction with high probability should be expected. When EUR/USD moves down, it means USD appreciates or the market is bullish on USD.
You check your observation on EUR/USD chart by taking a look at the USDX weekly chart. USDX is also showing an uptrend with a head and shoulder formed meaning a new trend in the down direction. When USDX moves down, it means the market is bearish on USD.
EUR/USD chart indicates a bullish USD while USDX Chart indicates a bearish USD. Both these observations are contradicting each other. Don't enter into a EUR/USD short trade. This is how you can use the USDX in trading EUR/USD pair. Good Luck!
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Get these Forex Scalping Cheatsheets plus the 10X Scalping System FREE. Download this award winning Forex Trading System that made 1,306.50% in one month FREE and watch the banned system video.
by: Ahmad Hassam
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Word Count: 571
Date: Fri, 29 Oct 2010
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