After you hear about the USDX, the first thing you probably wonder is how you can start using it for your trading strategy. The most traded pairs include the U.S. Dollar, and this is what you need to think about when you are looking for when you start to look at the USDX.
There are several pairs that include the U.S. Dollar including:
There are many other currency pairs that include the U.S dollar in them. If you are trading with any of those currency pairs, then you need to look at the USDX.
In fact, when you have a less than clear outlook on the US Dollar, the USDX can be a great way for you to clarify some of the ideas about where it might be headed.
The USDX contains more than 50% of the Euro, so it is inversely correlated to the EUR/USD. Check out an overlay of the USDX (in blue) compared to the chart of the EURUSD (In yellow):
It is just like a mirror of each other. When one goes up, the other goes down, and vice-versa.
The correlation between the USDX and EURUSD is so strong that there are people who monitor the markets will use USDX as an inverse indicator of the EUR/USD pair.
Interestingly, both Forex traders and traders of the USDX index play off of each other. This means that both sets of traders will pay attention to the market of the other to see where they might need to take their market. If the USDX is getting stronger, then Forex traders may take that as a sign to dump their EUR/USD.
In total, the USDX is a great indicator of the strength of the US Dollar in general.
Keep this in mind if you happen to trade a pair like USDCHF. This is a pair with the dollar as the leader, and it is important to remember that when thinking about how it might correlate with the USDX. In this case, as the USDX gets stronger, so does USDCHF.
In summary, simply try to remember these two tips when looking at using USDX to trade Forex:
- If the USD is the base currency, it will likely move in tandem with the USDX
- If the USD is the quote currency, it will likely move in the opposite direction of the USDX