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Chapter 27, Part I. Let’s Meet with Dollar Index. Page 5

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 26, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Using the USDX in Trading

    There are two major ways of using the USDX in trading. The first one is just to trade them. If you are not sure about the relative strength of the US dollar to a particular currency, say GBP, but in general you see that the US economy is far from to be glossy and shining – you may sell USDX. If you will become right, then the US Dollar Index will decline, even if the GBP/USD will rise. So, this is some kind of diversification, like if you are sure that the stock market will rise but do not know what particular stock to purchase – you may purchase an index. Even if some shares will decline – overall the index will rise.

    Second way is pictured on the chart #2.

    Chart #2 | Weekly USDX (Black) vs EUR/USD (Maroon)

    Here we see really strong negative correlation (almost 100%) of USDX with EUR/USD, but if you will be careful here – you’ll that from time to time some divergence appears between them. This is very common in major trend reversal points. That was right before the crisis in 2008 – EUR/USD has shown new top, while USD Index has not shown new bottom. The same was in 2009 and a small divergence in the beginning of 2011. This is weekly chart, but the same patterns you may find on lower time frames also.

    Probably some hidden divergences also could appear here.

    Pipruit: Other words, we can use USDX, as some kind of oscillator/indicator for EUR/USD to search for divergences?
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