You must be thinking, “How do I use it in trading?” Don’t worry, there is an answer right away. We know that the vast majority of widely traded currency pairs contain US dollars. If you don’t know, please listen, like Euro/USD, GBP/USD, USD/CHF, USD/JPY, and USD/CAD transactions include USD.
what does this mean? If you trade in these combinations, the dollar index will be the best thing after sliced bread (or burger or bun…or chocolate ice cream).
If you do not participate in related transactions, the dollar index will also let you know the strength of the dollar in the world. In fact, when the dollar market outlook is not clear, in most cases, the dollar index will indicate the dollar market prospects.
In the vast foreign exchange world, the US dollar index can be used as an indicator of whether the US dollar is strong. Because the weight of the euro in the composition of the US dollar index exceeds 50%, there is a very close negative correlation between the EUR/USD trend and the US dollar index. take a look:
Next, look at the EUR/USD chart:
This is like a mirror. If one goes up, the other is likely to fall. Did you see it? The trend line looks almost completely inversely related. This will help those who do euro/dollar transactions.
Trading friends in some forums use the US dollar index as an indicator of EUR/USD trading. If you want to use this index, talk to them more.
If the dollar index changes significantly, you can almost be sure that foreign exchange traders will act accordingly. The dollar index interacts with spot foreign exchange traders. The spot market of the US dollar currency has a breakthrough market, so it is almost certain that the US dollar index will also have a similar market.
In general, foreign exchange traders regard the US dollar index as an important indicator of the direction of the US dollar.
Keep in mind the status of the US dollar in transactions.
For example, if the US dollar index is strong and rising, and you are trading EUR/USD, the strong US dollar will appear as a decline in EUR/USD on the technical chart. If the U.S. dollar is the base currency in your trading portfolio, such as the U.S. dollar/Swiss franc, the rise in the U.S. dollar index will mean that the U.S. dollar/Swiss franc is also likely to be on the rise, as shown in the following figure:
You should keep in mind the following two points:
If the US dollar is the base currency (USD/XXX), then the trend of the US dollar index and the currency pair should be consistent;
If the US dollar is the quote currency (XXX/USD), then the dollar index moves in the opposite direction to the currency pair.