econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 11 November 2017

Currency Pairs And Their Indexes

by Rick Wright, Online Trading Academy

Online Trading Academy Article of the Week

Hello traders! One of the more interesting and helpful tools we have as traders is to use the correlation of the dollar index ($DXY) with our US dollar currency pairs. However, since non USD currencies don’t have their own index, we’ll have to make one. Let’s dive in!


Please share this article - Go to very top of page, right hand side, for social media buttons.


First of all, the dollar index is basically showing the strength or weakness of the US dollar vs. a basket of currencies. Kind of like the S&P 500 is used to measure the direction (strength or weakness) of the average stock, we can use the dollar index in the same way for US dollar currency pair trades. Currently, the dollar index is vs. the basket of: EUR, JPY, GBP, CAD, SEK, and the CHF. The weighting will vary slightly over time, but right now the EUR is approximately 57%, the Yen about 14%, and the Pound about 10%. Here is how it looks on a chart:

How to compare currency pair performance.

On this chart, I’ve marked in the high point on the dollar index going back to the beginning of the year, as well as the low so far this year. Notice how the USDJPY peaked within a few candles of the $DXY peak, and bottomed out in the exact same week. Because the USD is the base in the USDJPY currency pair, we expect the chart of the USDJPY and the $DXY to correlate pretty closely - a direct correlation. Now take a look at the EURUSD pair. The EURUSD bottomed out when the $DXY peaked, and the EURUSD peaked when the $DXY bottomed out. This is an inverse correlation, meaning it does the opposite.

For the sake of clarity on this chart, I did not mark in the supply and demand zones along the way to help us enter our trades, but the basic rules are as follows:

  1. If USD is the BASE currency, look to buy when both $DXY and currency pair is in demand.
  2. If USD is the QUOTE currency, look to buy the currency pair when it is in demand and the $DXY is in supply; look to sell the currency pair when it is in supply and the $DXY is in demand.

So, now that we know how to use the $DXY for USD pairs, what happens if we are trading something WITHOUT the USD in it? Like the EURJPY?

That is when making your “own" index can be helpful. Now, I’m talking about doing a bunch of math and software programming type stuff. All I’m talking about is comparing several currency pairs, with one currency being the same to deduce the strength or weakness of that one currency. The easiest example is the JPY, because it is always the quote currency. When doing this with something like the GBP, AUD, CAD, etc., you will have to understand the base vs. quote charts and what direction is strength vs. weakness.

How to create your own index for currency pair correlation.

On this screenshot, I’ve inserted four different currency pairs, all with the JPY as the quote. Again, for clarity’s sake, I’ve only marked in the major low on each chart for 2017. As you can see, all four bottomed out in the same week! Please also notice how the major swing highs and lows have very strong correlations. This should be a big clue to us as traders that if all four pairs are in a demand zone, it might be a good time to look to buy; and if all four currency pairs are in supply, it might be a good time to look for a sell.

Before I wrap up this week’s newsletter, I must make an extremely important point. Notice above, all I said was “buy" and “sell", not “long" or “short"!! That is because, in my humble opinion and in Online Trading Academy’s core strategy, just because you are in a good demand zone DOES NOT mean you automatically go long! (Or short in a good supply zone.) We believe that the trend is just as important as any zone you see. The point is this: in an uptrend we look to go long in a good demand zone. In a downtrend we look to go short in a good supply zone. In an uptrend, supply is used for profit targets; in a downtrend, demand is used for profit targets.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Investing








search_box
Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.







Keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved