Understanding the Dollar Index (DXY) is a fundamental requirement for all Forex traders.
The DXY is the USD Dollar Index that controls the value of the US Dollar (USD). If you have ever traded Forex, you have most likely traded a currency pair with the US Dollar included. Any currency pairs that contain the USD are known as major currency pairs. Any currency without the USD involved is a cross-currency pair.
The DXY base price is 100.00, which is relative to the percentage of price gain or loss. If the value is 97.00, this means a 3% decrease in value has occurred since the beginning of the index on that chart. There are many uses for the information gained from DXY movements. It’s an accurate reflection of the dollar price and how it compares to other currencies.
This information can also be used for other business objectives by goods and commerce. Any investor or interested party can examine the impact of economic conditions on the dollar in order to plan future financial moves. This information will also be used to convert currencies for travel and tourism.
How do you manage USD?
Breaking down conventional Forex charts on a technical level is similar to reading the US Dollar. However, when it comes to fundamentals and price movements, analyzing the US Dollar necessitates a deeper understanding. The fact that you have a bias for DXY will persuade you to think about the influence it will have on other instruments.
For example, if the Dollar Index goes up the EUR/USD chart will go down. That’s because the USD strength will pull the price down within the currency pair. On the other hand, if we look at USD/CAD, both the DXY and USD/CAD will move in a similar direction 100% of the time. So, managing biases and receiving conflicting information can easily send traders in circles. It’s, therefore, best to manage each asset on its own.
Keeping the Dollar Index in your watchlist is a good idea, even when considering your other pairs. Track it over time and plot on simple key levels on the higher timeframes such as daily, weekly and monthly. The Forex market should keep revisiting your key levels and analysis can provide that extra edge for your market judgement.
How do you trade DXY movements?
Let’s look at how we can use the DXY as a tool to find profitable trading setups. When analysing your watchlist of currency pairs, knowing where the DXY is on the chart and its overall sentiment can help with finding clarity for the other Forex pairs. You can then identify scenarios in which they correlate with your bias or viewpoint on the US Dollars forecast.
The news and fundamentals will have a large influence on the DXY. The global trade will also reflect in the value of US cross-rates across the world. So, when it comes to following the US economy and its impact on the Forex market, you can go as in-depth as you like. Jobs data or inflation numbers originating from the US government will provide the majority of the news that causes volatility.
Highly volatile market
Many traders may be enticed to participate in trading during live speeches by the Fed and the US president throughout the year in order to make a quick buck. More money is rushed into the market during major occasions, creating more manipulation by larger investors and rendering the market more volatile.
That’s why we recommend that our Forex traders not trade during heavy news announcements that could affect their open trades. Sometimes, the price is pushed so hard in both directions that stops are triggered.
Moving the US Dollar
While some positive US news may appear as if it will increase the value of the dollar, you need to interpret how the data will affect world trade or other business interests. We can view currency circulation, volume, and other factors that will move the value of the dollar.
If you forecast dollar weakness in alignment with the fundamentals, then it might be worth looking to see if the EUR/USD chart has enough bullish confluences to enter into a long/buy position to take advantage of the forecasted dollar move.
It is also possible to trade indices such as the US30 where you can also take advantage of US economics. Spreads and trade conditions are similar to trading commodities – something to keep in mind. As of late, some traders have been able to profit lucratively from the US indices.
Gathering evidence on the US Dollar’s movements can put you steps ahead of other Forex traders. Knowing the key levels and volume times will enable you to effectively manage trades relative to the daily news.
If you do have any major currency pairs on your watchlist, it is also crucial to review the DXY chart before and during a trade to make sure you are taking into account the full story. If you haven’t yet looked at the DXY, search ‘DXY’ on Trading View, and back-test your technical breakdown strategies to understand its movements.