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Dollar Index

The US Dollar Index: For those of you who have been trading stocks andcurrency trading forex anna shares online, you will already be familiar with the VIX which is a market sentiment indicator based on the balance of option buying and selling in the market. In essence it indicates the levels of fear or complacency in the market, and is used as a contrarian indicator. In other words if everyone is very relaxed and the calm and the indicator is low, then it is time to do the opposite and sell, and similarly when the readings are high with fear in the markets, it is time to buy. The VIX slogan is " when the VIX is low it's time to go, when the VIX is high it's time to buy". The currency market has it's own market sentiment indicators called the US Dollar Index and the COT report ( which we shall look at on the next page). 

Dollar Index : Explained

Currency Weighting in US Dollar Index
Euro - Euro zone 57.60%
Japanese Yen 13.60%
British Pound 11.90%
Canadian Dollar 9.10%
Swedish Krona 4.20%
Swiss Franc 3.60%

The US dollar index ( ticker code USDX)  is one that has been around a long time ( 1973 ) but is little used by retail currency traders as generally they have never heard of it! It is a futures index which is quoted 24 hours a day seven days a week and is on the NYBOT ( New York Board of Trade ), and represents the relationship between the US dollar and six major currencies. These are as shown alongside, along with the weighting of each currency in the index. In addition to the above there is also a trade weighted index which reflects the dollar's value against foreign currencies, but based on US trade and how competitive US goods are against foreign competition.

How do we use the US dollar index to help us in our currency trading decisions - as always we keep it as simple as possible. By using a combination of candlestick technical analysis, support and resistance and moving averages, we can form a view of the US dollar based on long term trends, possible short term and long term reversals and changes in market sentiment, against the major currencies in the basket. It is important to understand, as I have said before, that like it or not, the US dollar dictates the trends in all the major currencies, and therefore this index will give you an excellent starting point for determining its strength or weakness in relation to the currency pairs. In general I use it more for long term trends rather than short term reversals, but it will give you another tool to use in your currency trading analysis.

The last tool I would like to look at is the odd sounding thing called the COT report. This report is one of the most valuable pieces of data you will find, and yet it is little used by most traders. I have no idea why this is, as it provides a view of the underlying sentiment on the market from the insiders perspective, so it is as close as you can get to a view by the market makers!!

OK, let's take a look at at now - I will be developing a site which is just an update and view of this report which is published weekly, so please check back regularly for an update.


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