For the first time, the US dollar index was the subject of discussion in the early ‘70s. Its appearance occurred immediately after the Bretton Woods system, which had become popular at that time. World currencies have completely switched to a free-floating mode, although the American dollar remained the most significant of them since global trade depended heavily on the developed American economy. For example, on the Alpari broker, it is the most popular trading currency.
The Impact of the Dollar Index on Forex
Despite the variety of financial instruments on Forex and, in particular, numerous currency pairs, the greatest profit potential among them contains assets that are directly related to the US dollar. It happens because it is the basis of all world trade. In this regard, the USDX index rate allows you to determine the strength or weakness of the US currency. Therefore, it allows understanding the direction of movement for quotes of a huge number of different interrelated trading instruments. Thus, it can be said that the US dollar index is an online indicator of a peculiar nature. It allows you to determine the current market situation and take the right position to trade most safely, that is, according to the stocks trend.
Usually, any change in the movement of the USDX index allows you to predict the trend of currency assets that are directly related to the US dollar, and these are all major pairs. In this regard, experienced traders carefully monitor all the trends that are observed on the USDX chart. By the way, technical and fundamental analysis methods work perfectly here. Therefore, drawing support and resistance levels, searching for candlestick patterns, and monitoring the general news background provide great opportunities for determining good long-term trends and short-term trend changes. As a result, it helps to earn finance on Forex trading.
Dollar Index Trading Strategies
The US dollar index plays the role of an extremely important analytical assistant in almost any of the financial exchange markets of the world. Therefore, you can work directly with this tool. However, this approach is not very common among traders. It is considered more promising to observe the index, analyzing its path according to the price chart, and work on Forex with currency pairs that are sensitive and broadly responsive to the strengthening or weakening of the American currency.
The main trading strategy here is to work on the trend. That is, the definition of a global trend allows large investors to take long-term positions that bring good returns. However, this does not prevent the use of dollar fluctuations for those traders who work on daily charts. If you don’t have enough skills and experience in trading, you can get help from professionals like Forextime.
Whatever strategy the trader chooses, he must also take into account the general provisions when working with the US dollar index. First of all, you need to understand the importance of the mark of 100 points, which was introduced when creating the index in the 73rd year of the last century. It indicates the relative strength or weakness of the dollar.