How To Trade Forex Using USDX Chart
The US Dollar Index is a measure of the value of the United States Dollar relative to a basket of foreign currencies. It is a mean value of rate fluctuation of USD compared with the six major world currencies JPY, EUR, GBP, CAD, CHF and SEK.
This weighted value is calculated by factoring in the foreign exchange rates of the six major world currencies: the Euro, Japanese Yen, Canadian Dollar, British Pound, Swedish Krona and Swiss Franc. Started in March 1973 (after the introduction of floating exchange rates system, what is now known as the Forex Market).
This quote of this index has a base of 100 - the base was the starting point/reference for calculation of the weighted value of the Dollar.
It is also used by the US Federal Reserve System to calculate the trade and weighted index value. The weighted USDX is calculated in regards to the currencies of countries that form USA foreign international trade turnover. These countries are European Union 57.6%, Japan 13.6%, Great Britain 11.9%, Canada 9.1%, Sweden 4.2% and Switzerland 3.6%.
Therefore this value represents is a weighted mean of the US currency value compared with:
- Euro Zone, EUR - 57.6%
- Japan, JPY - 13.6%
- Great Britain, GBP -11.9%
- Canadian, CAD - 9.1%
- Swedish, SEK - 4.2%
- Swiss, CHF - 3.6%
Basket of Weighted Currencies
When the USDX goes higher the US dollar gains more value compared to other currencies. Ifit goes up to 110 the value of USD exchange rates would have increased by 10%, if it went down to 90 then the value of USD exchange rates would have decreased by 10%. The highest level it has ever reached is 160 and the lowest level was 78.
This index is updated whenever US markets are open, which is from Sunday evening New York time to Friday afternoon New York time and it is continuously calculated and updated based upon the information of current exchange rate.
This index chart is one of the instruments used by traders to forecast exchange rates of other currency pairs in comparison to the US dollar.
In the stock market, the stock index(Dow Jones Index, NASDAQ Composite, S&P) is used to show the general condition of the stock market. In the Forex market, the USDX is used to show the general trend of the foreign exchange rates.
USDX=EUR * 0.576 x JPY * 0.136 x GBP * 0.119 x CAD * 0.091 x SEK * 0.042 x CHF * 0.036
It is then plotted on a chart and traders use it as an indicator for the direction of the USD Currency.
- When the trend is going down it means traders are selling the Dollar
- When the trend is going up it means exchange traders are buying the Dollar
The example below shows a USDX chart, it is drawn the same way as the other currency charts.
Technical Analysis of EURUSD using USDX
The chart of US Dollar index is inversely correlated to EURUSD, meaning the two of them will move in the opposite directions, when one moves up the moves down and vice versa.
The example below shows the EURUSD.
USDX compared with the EURUSD chart
The example below shows the US Index chart super-imposed on a EURUSD. From this example image you can see the inverse/reverse correlation of these two. The signals generated are the exact opposite of one another. In technical analysis USDX is used to determine the direction of the EURUSD using this inverse correlation.
USDX compared with EURUSD