Discover how to use dollar index to trade Forex and have profitable results

The US dollar index chart is just a basket of currencies and their Dollar pairs. Watch our latest video and learn how to use dollar index to trade Forex

How to use dollar index to trade Forex – basics explained

Hello and welcome to Diary of a Trader. Today’s video we’re going to go over how to implement the Dollar Index into your trading if you’re a Forex trader. The Dollar Index is just a basket of currencies and their Dollar pairs and it shows you how was the Dollar performing against that basket of currencies. Now, most of the Dollar Index has the Euro/Dollar pair in it. It also has the Pound/Dollar the Dollar/Yen and it has the Swedish Krona in there as well. There’s a lot of discussion about them, you know, redoing the Dollar Index because it should probably have the Peso in there, the Canadian Dollar the Renminbi Chinese currency and balance it all a bit because it has not changed for a long time, but regardless, when we see the Dollar Index, it’s giving us an idea of where the Dollar is performing against other currencies, other Dollar pairs.

And how do we implement this into our trading? Well, we want to, let’s say we trade the Euro/Dollar and I want to do a side by side comparison. So, here’s the Euro and then I’ll put the Dollar Index over here. And if you don’t know where to find the Dollar Index, we just go to DXY and click on CFD. That means Contract for Difference, and it’ll give you this and then just click on it, it’ll put it in your watch list and then you can get the Dollar Index right here. So, what we’ll notice is that, one great example, and I think something that we will all be able to notice is that as the Dollar Index rises, the Euro falls. If we look at the current price action right now, if we were to highlight that zone, we can see that we’ve had, these are both hourly charts, we can see that we’ve had three hours of a downtrend in those candlesticks, and currently, now it looks like we’re having somewhat of a bounce. We look over here, we see really, just the exact opposite of that move. We have three hours of a rise in the Euro, followed by a little bit of a top here forming with some selling. And this is pretty normal to see because, you know, again, most of the Dollar Index is weighted with the Euro. I think it’s 50 to 56% of it is weighted with the Euro.

So, how does that work with other currencies because sometimes it’s not easy to catch a change in the Dollar strength when trading the Euro because they’re too sensitive. One thing that we can look at is the Pound/Dollar. Whatever dollar currency besides the Euro, sometimes we can catch a move that happens in the Dollar Index, before we notice a change in another currency, and we sometimes kind of have to do this on a shorter time frame, like a 15-minute time frame. So this is the Pound/Dollar on the left and then here is the Dollar Index on the right. And what I’m looking for is some type of Candlestick pattern or change that indicates we’ll see some move in price before… In the Dollar Index, that would happen a little bit before we would see a change in another Forex pair. So, if I’m looking here, see this was at 7:45 in the morning, 7:45 in the morning, that one wouldn’t have really tipped anything off. However, with the selling that was going on here, the selling tip is kind of indicating that we had some selling pressure that was a little bit ahead of the game in the Dollar Index that we wouldn’t have caught on the Pound, so we could have capitalized on noticing a drive down in the Dollar Index, by looking at a long trade in the Pound. This is like an arbitrage opportunity if you want to consider it that, but sometimes we can get a view of this, on the daily chart as well, because not every move that we see is going to have an inverse reaction. So, on the Pound/Dollar and then the Dollar Index, what I’m saying is that it is possible to have days where the Dollar Index is trading down and the Pound is trading down, but those instances are far and few between. But when you notice them, those are good signs that you should take the trade that it’s going to be going. So, what I’m what I’m saying is that if you notice that the Dollar Index is rising and on that same daily chart, you see a candlestick or a couple of candlesticks that are also rising when the Dollar is, at the same time that’s a good indication that you’re having a lagging move in the Pound/Dollar and that you could safely entertain a short idea because there’s a bit of a lag in the performance of that pair.

If we look at the 1st of June, right here, here’s the 1st of June, that’s a bullish looking Candlestick, right? Well, rather not… No, it’s bullish Candlestick. But we had a day where there was more buyers than sellers and that is shared with the Pound as well. But, what do we know about this? We know that as we were moving, we had a large sell-off from a top, we’re pretty top heavy here, and then we see the Dollar Index is actually starting to continue a move lower because then we had a shared bearish Candlestick on the 4th. So, both the Dollar Index and the Pound had an up day on the same day and then followed by a down day on the same day. But this is where we use our trader’s intuition, we use some oscillators, so we could use the Stochastic RSI on that chart and on this chart as well, and certainly looking at it on these days, what could we infer from these moves? Well, because the Stochastic RSI was in a downward slope, we would know that the Dollar Index as a whole, because it’s so weighted against other currencies, we knew that the Euro was trending up heavily here, even though the Pound wasn’t, that we had a good idea that the conditions of our oscillators and the relative trend change that we noticed earlier, in the DXY, told us that a long entry on the close of the daily would have been a nice drive up, and that’s exactly what happened.

Now, again, you don’t see a lot of these trade opportunities pop up, but when they do, you should notice them and pay attention to them. Certainly, one of the nice ways to kind of gauge where is the… If you trade a lot of the Dollar pairs, like the Dollar/Yen, the Gold-Dollar, US Dollar/Canadian Dollar, etc., paying attention to the Dollar Index is a very good way to kind of gauge the overall strength of that currency, with the pairs that you’re trading, and that can really help you determine your intra-day trades and your macro weekly trades, by gauging how the Dollar Index is currently operating, because certainly, if we have a day where if we’re up in the Dollar Index and we’re up in another non-Euro pair, like the Pound/Dollar, the Canadian Dollar, Aussie Dollar, New Zealand Dollar, if they’re trading up during the day, the same time as the Dollar Index is, then we need to pay attention to those times, because those can certainly turn into good trading opportunities. Thank you for watching this video and I look forward to talking with you in the future, with our future videos. Bye-bye.