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Four patterns that new FX traders can utilize

Which technical indicators to watch when you're starting out For many , foreign exchange (FX) can seem a bit overwhelming at first glance. Given the complexity of the data or charts, it is not always clear what the best tools or patterns are to use in your trading.


How to filter out market noise?

Looking at the ways one can take in order to look past the 'noise' When it's too noisy, you often can't make out what you want to hear. You may get confused and do something wrong. The same thing can happen when you trade currencies as technical analysis can be complicated by the so-called 'market noise'.


Before you make a trade ask yourself: Who is on the other side?

The question reveals whether or not you have an edge The best thing you can read right now is a report from Bluemountain Investment Research titled: Who is on the other side? They sumarize it like this: If you buy or sell a security and expect an excess return, you should have a good answer to the question "Who is on the other side?" In effect, you are specifying the source of your advantage, or edge. We categorize inefficiencies in four areas: behavioral, analytical, informational, and technical (BAIT). Put more simply, that would mean an advantage via: 1) less emotion and more objectivity 2) better research and preparation 3) having information others don't have 4) taking advantage of forced transactions. Generally, retail traders are at the mercy of larger operations but that shouldn't be a surprise to anyone given the stats on retail success. I'm not going to try to summarize any more than that because it's a 30-page report with 140 references. Scott Barlow from the Globe & Mail said it was "the best research report ever written for investors." It's geared toward stock markets but almost all of it equally applies to FX. One difference is that FX is more flow driven while virtually all stock buying/selling is via analysis. It also comes with a handy checklist and (as the video below shows), checklists are one of my favorite things.   ForexLive


How to trade market sentiment

Understand the mood of the market Emotions are the key to understanding financial markets. However, it's tough to make rational decisions based on them. Even if you think you read your emotions or other peoples emotions, you may get lost in trying to comprehend the feelings of the crowd. And the market sentiment is the emotions of millions of traders around the world. If you'd like to know more about it, read the guide by SimpleFX WebTrader. The behavior of the masses works differently from the mechanism that determines individual actions. The discovery is quite old and well described in a book by a French anthropologist Gustave Le Bon in 1895 "The Crowd: A Study of the Popular Mind." The author states some of the characteristics of the psychology of the crowds: "impulsiveness, irritability, incapacity to reason, the absence of judgment of the critical spirit, the exaggeration of sentiments, and others..." Trying to take advantage form market sentiment is a common mistake by individual traders, source: SimpleFX WebTrader Every trader knows the importance of emotions. You can see it in market volatility; you can see that some stock is overvalued in comparison to the company's fundamentals, and others are undervalued. Just like people on a rock concert, football game, or political demonstration transcend from individuals to a crowd, traders around the world create an entity that has its emotions and moods. The state of mind of the crowd of traders is called market sentiment. The market sentiment is one of the three possible pillars for any trading strategy: Technical Analysis Fundamental Analysis / Trading the News Reading Market Sentiment For Forex and especially cryptocurrency traders fundamental analysis is much more difficult to apply than on the stock market. That is why these markets traders focus on technical analysis. Bulls, bears and "dumb money" Understanding the sentiment will let you know whether the crowd is optimistic (bull market), cautious or pessimistic (bear market) about a currency, stock or crypto. Identifying the current trend can help you predict the future overall market sentiment and will open sentiment-based trading opportunities. Market sentiment works for all kind of markets, but it is very difficult to read. There are big players, such as institutional banks that can play against the prevailing sentiment, and seek for so-called "dumb money." Wait until the crowd gets all in on a particular position - be it long or short - and use the trading power to incite a reversal. Follow or go against the market sentiment There are two possible strategies for using the market sentiment. You can go with the current and try to join the crowd or trade against the sentiment. The first strategy would include tactics involving the Fibonacci retracement tool, that can help traders profit from local price corrections. The second strategy is all about hunting for reversals identifying support and resistance levels and taking into consideration the overall market sentiment to decide whether a breakout may happen. Safe-havens play an important role when the market sentiment goes to extremes, or there's an overwhelming uncertainty. Assets like gold, USD, CHF or JPY are considered an excellent shelter in case of too much risk. When more volatile assets are entering a bear market, traders (including the most prominent players) tend to seek these safe-havens, which automatically creates a bull market on ultrasafe assets. The two most dominant emotions Fear and greed are the most dominant emotions among traders. They are either afraid of losing money, or they want to earn more. Greed is overwhelming at market peaks when the bubble is created.A classic example of greed taking over in the peak of 2017 Bitcoin bubble, source: SimpleFX WebTrader More and more people open the same long position on a hot asset be it a tech company, a currency of a fast-growing economy or a popular cryptocurrency. Just take a look at the most significant burst in crypto. On the other hand, fear takes over when the market hits bottom. Traders are panicking underestimating the real value of an asset. A savvy investor can see an opportunity for opening a long position in these situations. However, trading against the trend always involves high risk. How to identify fear or greed? When you see a trend accelerating breaking new resistance levels without any fundamental explanation - no critical information that would justify it - you may expect the greed is in action. The same mechanism works the other way around with fear. If during a downtrends support levels are broken without an apparent reason, the fear may have taken over. How to spot "dumb money" "Dumb money" is where traders are taking the most popular and the most obvious moves. Everyone takes the hottest position, more and more people join and put themselves in a very vulnerable position. Let's take a look at Forex, a market where individual traders compete with the largest banks to make successful trades. Forex is as susceptible to market sentiment. Both the biggest institutional traders and the smartest individual traders see where the "dumb money" goes. Then when there's the right time, the most prominent players open an opposite position and take the profit. You can find indicators that show the number of traders having a short or a long position on an instrument. It turns out that the market almost always suddenly goes the other way rapidly cleaning the trading accounts of those who "hang out with the popular kids," that follows the crowd. Hindsight bias The market sentiment is very easy to read if you take a look back. Everything seems to be visible. Even if you are new to trading, you can easily spot greed taking over just when the bubble is about to burst. However, at the time of the bubble, hardly anyone notices it, even the wisest and most experienced traders. It's difficult to profit directly from fear or greed taking over. Even if you can read the past and present sentiment correctly, you need to know what the collective traders' mood will be like tomorrow. Without any insider knowledge or ability to influence the prices with your trading volume it's impossible to do it repetitively. What is the best market sentiment strategy? Keep away from it. If you don't use the most popular technical analysis tools and don't trade reversals, you can avoid the riskiest moves. If you don't want to play the "dumb money" but avoid it, you can focus on developing an effective trading strategy. You don't have to know where the "dumb money" will go. All you need to know is where the "dumb money" is usually and at present. There's no good way to chase sentiment. It doesn't matter if you want to trade along with it or against it. Guessing the future sentiment is a risky move, that's why avoiding market sentiment at all may prove to work best for you. Doing so you could develop a sustainable trading strategy with the right mixture of technical and fundamental analysis. Don't chase the sentiment. Invest not in the most popular assets, such as EURUSD, but the ones that are more off the radar. It's best to find your own niche. Don't be a herd trader. Choose one of the hundreds of instruments available at SimpleFX WebTrader, and use the best technical analysis UX and tools to learn how to trade effectively and don't get disturbed. This article was submitted by SimpleFX.


Video: Trump and Soros share the same secret behind their wealth

Trump and Soros' secret to riches There is power in truth but there might be more power in what isn't real. George Soros and Donald Trump both found a way to exploit the same thing and it has critical implications for what's coming next in the foreign exchange market. Want to know when we've got a new video out? Click here to subscribe to our YouTube channel. ForexLive


InstaForex: How to stay ahead in quieter markets

The know hows on dealing with slower trading periods Lulls in trading can present just as much challenges as periods of great movement and volatility. During quieter intervals however, ranges can be smaller due to the reduced volatility with many institutional traders away from their desks - what is the overall impact of this on your trading? Firstly, markets are more susceptible to having patches of illiquidity with random moves taking out stops more readily on any lack of order flow. Consequently, these can result in some frustrating trading experiences. The below article delves into some useful tips to help you keep a level head during periods of stagnation or reduced volatility. Be on the lookout for surprise events Always stay on top of upcoming events, releases, or announcements. Just because the market may seem a sea of calm, does not mean that very large moves do not occur across currency markets. Whether it be some surprise political development in the US with the Trump administration or seismic changes in the Turkish Lira, stay on the lookout. While it is important to note that moves such as these are not to be counted on habitually and are quite rare, they are indeed possible at any time. As such, make sure to keep alert for any major market moving news. Take a break Forcing trades and moves can be potentially catastrophic for your trading. Instead, whether it's the dead of summer or the lull of winter, it may be fruitful to factor in a break during your day and make sure you don't trade when you are on holiday. Time spent away from markets is crucial to help adjust and recover from hours of hawkishly observing the same charts and feeds. The markets will still be there when you return, just make sure you are fresh and in the right state of mine when moves do start happening. Willingness to reduce intraday targets Some of the most consistent traders in the world preach smaller profits and trade sizes. In this way you may want to consider taking slightly smaller profits during slower periods and particularly consider taking profits when price pushes into key support and resistance levels which are less likely to break. For example, if you normally look for 60% of the average true range for your profit target, it may be worth taking even 50% of the average true range instead. Profit is still profit. The importance of wider intraday stops At first this can seem counter intuitive, if ranges are narrower shouldn't you use smaller stops too? This is not necessarily so black and white however. To fully understand this point look at the market when it opens each week on a Sunday evening.  What do you notice? You will see a market that seems slow, yet it can have very quick and strong short-term directional moves. Why is this and what is going in here? This is how an illiquid market moves. Now, if there is a lack of liquidity during normal market hours the same type of price action can occur. This can needlessly take out your stops, so consider reducing your position size and setting wider stops. Don't sleep on changing market dynamics Presently, automation has been impacting nearly every area of our lives and FX trading is no exception. Once institutions looked to 'the man', now more and more they look to 'the machine' - this trend is unlikely to stop anytime soon. Algorithmic trading has increased considerably over the last few years and this is resulting in a key change. The algorithmic trading model involves the 'algos' being switched on during the whole year; computers do not need a holiday.Their short-term, constant day to day profit profiles means that they are going to be left running during the summer or slower months. Why is this important? Even though the large investors may have key staff on holiday or be away from their desks, the age of automation means that the trading of assets in FX goes on.Technical levels are still in playNo matter what time of year it is technical levels are never forgotten. The key moving averages are always respected and that means you should do.  Key moving averages like the 50 MA, the 100 MA and the 200 MA will still be respected so these should always be in the back of your mind.By extension, Fibonacci retracement levels and horizontal support and resistance levels can still be relied upon.Ranges deserve your attentionMuch like technical levels, trading ranges are also of supreme importance throughout the year. For example, if there is a strong range in play, then it is more likely to hold during slower trading periods.Pay attention to tests of key levels and take a quick look at the news. Are there any key releases that are coming out? If there is not, then the chances of a well-established range holding are strong.It could be a great location to trade a quick bounce off a key level. Similarly, if a key level looks like breaking during the summer months, and there is little in the way of significant market news, then that break may well be a false break. So, be aware of these two phenomena; strong ranges holding and false breakouts of key levels.- This article was submitted by Instaforex.


How to enhance your trading experience using price bands

How to use price bands - This article was submitted by moving average usually helps us detect the trend of the price of certain financial assets. However, prices usually fluctuate around the moving average. Whether you prefer breakout trading or sideways trading, price bands will support you in your journey. We will cover three technical analysis indicators that are used to quantify how much prices fluctuate near a certain moving average. Bollinger Bands, Keltner Channel, and Envelopes are among the most used trading tools. The upper and lower bands for the mentioned three indicators could be used as support and resistance. A trader could adjust the inputs of these indicators in order to suit his trading style. If the trader is trading the reversion to the mean, he will be using larger inputs. He will initiate sell positions near the upper band and buy positions near the lower band, as he believes that near these bands, the prices are extended. On the contrary, if a trader is looking for breakouts, he will be using smaller inputs to jump into trades at the earlier stages of an upcoming trend. Bollinger Bands The popular Bollinger band indicator was developed by John. A. Bollinger. It consists of a simple moving average and two standard deviations; one above and one below the moving average. The moving average is named as the middle band, the standard deviation above is called the upper band, and the standard deviation below is called the lower band. He used the standard deviation as it will give him a signal about the current market volatility. When the volatility is low, the bands get closer to the moving average which will give a signal to the trader that the market could be preparing for a move. On the other hand, when the bands are extremely far away from the moving average, it is a hint that the current market move is coming to an end. The below chart is the daily USDCAD chart with the regular inputs of the Bollinger band indicator (Moving average 20, Standard Deviation 2). The above chart sums up the benefits of the Bollinger band indicator. We can see that when the bands were getting closer to the moving average, we were preparing for a breakout (1), and when the bands were extremely far from the moving average, it gave the trader a signal that the current move is about to end (2). Moreover, the circles prove that the upper and lower bands are used as dynamic support and resistance. Even when the market was trending up, the pair was finding resistance near the upper band and was dropping back towards the moving average which acted as a support. Some breakout traders are now using a new version of the Bollinger band indicator, which only plots the minimum value of the standard deviation that is opposite to the current price direction. The above chart shows the same phase of the USDCAD pair, but with the new version of Bollinger bands that only draws the minimum deviation of the band opposite the price. In a trending market, the break of the upper band is usually considered as the break of resistance and the break of the lower band is usually considered as the break of support. Keltner Channel Keltner Channel is another technical analysis indicator that is used to detect the range where the price fluctuates from the moving average. It consists of a moving average and upper and lower bands. The bands are formed by calculating the Average True Range of the same period of the moving average and adding above and below the moving average. Simply, if the 20-day simple moving average of the USDCAD pair is at 1.3288, the Average True Range of the last 20 days is 0.0081, and the multiplier is set at 1, then the upper band will be at 1.3369, and the lower band will be at 1.3207. If we are looking to trade reversals from overextended price moves, we should raise the multiplier to possibly detect the extremes and jump into trades. The above chart shows the USDCAD daily chart, with Keltner Channel using a 20-day simple moving average and multiplier 1 ATR. Such inputs could help a trader to enter breakout trades, but he should be using a proper stop loss and strict risk management.  The above chart shows the USDCAD daily chart, with Keltner Channel using 20-day simple moving average and multiplier 3 ATR. Such input supported the trader in noticing overextended moves. It gives fewer signals but reduces the chances of defects.  Moving Average Envelopes A moving average envelope is a technical indicator that uses a moving average with an upper and lower band. The upper band is formed by adding a specified percentage above the moving average, and the lower band is formed by adding the same specified percentage below the moving average. Simply, if the 20-day simple moving average of the USDCAD is at 1.3288, we add (1.3288*1%) above the moving average to obtain the upper band and we deduct (1.3288*1%) from the moving average to obtain the lower band. The interpretation is similar to the one of the Keltner Channel, if a trader is seeking breakout trades, he will use a smaller percentage, and if he is searching for the extremes, he should be using a larger percentage.  The above chart shows the USDCAD daily chart, with a simple moving average envelope using 20 as period and 0.5% as a percentage. Such inputs will create numerous trade opportunities which will increase the chances of jumping into losing trades. The above chart is the USDCAD daily chart, with the moving average envelope using 20 as period and 2% as a percentage. The trader will be able to find price extremes and trade back to the mean. Finally, all the above-mentioned indicators are used for the same purposes. They can help us to detect when the market is less volatile and preparing for a breakout, and when the market is overextended. A trader must choose the input that suits his trading style. If he is aiming to find the overbought and oversold zone and trade the price back to the mean then he should be using higher standard deviation, ATR multiplier, or percentage. If a trader wants to scalp or even join an upcoming trend, he should use smaller inputs for the bands. However, a more sensitive indicator would create many trading signals but with smaller chances of success. Make sure you set the proper inputs that suit your trading style and always apply an appropriate strategy with strict risk management to accomplish better trading performance.


How to make sure that you take all your profit

Tips for taking profits Trading is a game of patience and mental resilience. If you want to get your pips of profit from the market, you need to be like a hunter: determine the exit levels in advance and stay on a stakeout until the market settles the bill. A feather in the hand is better than a bird in the air. That's why we have a positive opinion about take profit orders in general. You never know whether the market will be able to give you more, so it's necessary to place a TP somewhere and not to be too greedy. Ways to find a nice spot for a TP Different trading strategies imply different techniques of placing take profit orders, so we will review several options here.Support and resistance levels It's a simple but elegant solution. The most evident S&R levels (trendlines, previous highs and lows, Moving Averages, Fibonacci, pivot points, etc.) act as a magnet for the price. Billions of traders recognize them and tie their orders to them, so it's only natural that the price goes there. Don't forget to check higher timeframes as there can be recognizable levels that are ideal for TPs. If several things point at the importance of a particular level, there are even more reasons to use it as an exit point. In most cases, it's safer to be a little conservative and place a TP a few pips below the resistance and a few pips above the support. After all, S&R are not levels as such but more like areas. In fact, this piece of advice is good for other methods of locating TP as well.  Fibonacci retracement and moving averages offered a good place to take profit in GBP/USD long.  2. Chart patterns Chart patterns (Head and Shoulders, Double Top and Bottom and more complicated ones like the harmonic Gartley and others) offer rather distinct guidance on where to put a TP. The best thing is that this guidance has a solid logical foundation. For example, H&S shows how traders gradually lose confidence in a trend. This pattern attracts attention of many investors who are willing to trade the reversal. As a result, in the majority of cases, the price goes down as much as the height of the pattern and it often happens that a bigger downtrend follows. A H&S and a round level offered a place for a TP in EUR/NZD short. The market went further down, but that can offer ideas for further trades: there's no point in trying to catch all moves of the market in a single trade. 3. Daily scope It's always necessary to judge the relative size of candlesticks on the chart to estimate the scope of the potential price movement and the time it will take to arrive there. The ATR indicator can give you a hand in measuring volatility during a certain period of time. Add the value of ATR to your entry point and you'll get your TP. Notice though that it would make sense to adjust it for the evident S&R levels you see nearby. Daily ATR is 64 pips. With EUR/USD already up by 20 pips, it's possible to set a TP for a buy trade 40 pips away. 4. Your level of risk It's a golden rule of trading: your potential profit in a trade should always be bigger than your risk. As a result, you can start from risk: if you have determined a specific stop loss, you can calculate TP using an acceptable risk/reward ratio. A classic solution is a risk/reward ratio of 1:3 (if a SL is 20 pips, the TP should be 60 pips).  Intraday traders can use time TPs in order to have all trades closed before the end of the day. Although this approach is worthy of existing, it looks too detached from what's actually happening in the market, so it is not our first choice. If you choose not to set TPs in advance and "see how it goes", then you can take cues from big candlesticks (they are usually followed by consolidations or corrections, so it can be wise to take profit right after them), divergence between the price chart and oscillators (as well as overbought/oversold oscillators) and the appearance of a signal in another direction. Yet, experience shows that if you are doing something more than scalping, it's wise to keep calm and set a TP.   Conclusion A poorly placed take profit can kill a brilliant trade idea. Don't underestimate the importance of this step in your trading and always make sure that you are acting in line with the rules of risk management. The art of a good take profit is the ability to keep in mind several things (S&R, average range, risk/reward ratio) and find a TP position that would fit them all in a maximum possible way. Another critical thing: don't move your take profit closer to the entry price and fight the temptation to manually close a trade ahead of time: you should have trust in your initial analysis and planning. Otherwise, there will be no point in searching for a good place for a TP. Remember that the market loves planning and precise execution - these are the vital elements of a sustainable profit. Good luck!      This article was submitted by FBS.


InstaForex: What leverage can suit both newbies and professionals?

What's the right amount of leverage? Many traders often ask themselves what leverage is better to be used. They are not only newbies but also experienced investors who, being self-confident, want to make more profits and do it faster, so they try out various values of leverage. Let us remind that leverage is a certain amount of credit funds that a broker lends to traders in accordance with itstrading conditions. Leverage provides traders with an opportunity to open buy or sell deals and work with much bigger sums of money than they deposit. The size of leverage varies. A broker offersa range of leverage values while traders need to choose what leverage suits them best. Additionally, leverage determines the trading manner: whether it is risky and intense or relaxed and easygoing. Risky traders can reap hefty profits but not regularly while calm traders can make moderate earnings but more often. In a nutshell, leverage is the ratio of traders' own funds to the funds that are traded on their account. This ratio is denoted in the following way: 1:100, 1:230, 1:125, and so on. The first figure stands for the currency unit while the second figure defines how many times a deposit is increased. For example, if traders deposited 200 USD and applied the leverage of 1:100, then they can trade with 20,000 USD. In fact, leverage is not necessary for trading on Forex, but the profit that can be received without borrowed money is comparatively smaller, especially if the initial deposit is not big. The thing is that prices of currency pairs change no more than 1% per day. At the same time, with the high chances to earn there are also high risks to lose. That is why the right leverage is really important. When tradersregister an account with a broker, they can choose from various leverage values. Usually, the values from 1:10 to 1:500 are offered. The most widely used leverage is 1:100, but risky or aggressive traders, employing the scalping strategy, for example, can try bigger values up to 1:300 or 1:500. What leverage suits newbies best? Beginners on Forex should make carefully weighed decisions when choosing the leverage.  At first, they are better to take on low risks, therefore applying low leverage. Naturally, initial profits are to be modest with a small amount of borrowed funds, but as traders gain experience, they can enhance their risks, thus increasing their earnings. Besides, the lower the leverage, the lower the risk of losing the whole deposit. In some way, it balances the loss/profit ratio. And here is another piece of advice for newbies: they need to test their trading system with the chosen leverage on a demo account at first, and only after that they can deposit to a live account. Additionally, traders need to check whether a broker provides an opportunity to change the leverage value after an account is opened, as some companies do not allow doing it, so clients have to register new accounts which is rather inconvenient. The key thing to keep in mind is that the size of your leverage should correspond to your experience in the market. If this condition is fulfilled, your trading will be successful from the very first day. Leverage size Two factors can help beginning traders to choose the leverage that suits them best. 1. The appropriate leverage for trading on Forex. Most traders prefer using the ratio of 1:100. This factor implies high risks but also it can generate hefty profits. It provides an opportunity to open counter deals which can amount to 1% of the total trade volume. 2. Small leverage. It is mainly used for trading with big deposits (sums can come up to several thousand dollars). The recommended leverage in this case is 1:1, 1:10 or 1:50. This leverage value enables traders to attempt complex maneuvers and protects their deposits from losses regardless of price fluctuations. Besides, a broker may advise its clients what leverage is better to choose. The maximum leverage and opportunities provided by the broker also should be considered. For example,InstaForex offers its clients a wide range of leverage values, including the most popular among newbies ratios of 1:100 and 1:500. Importantly, the trading strategy that is being employed and trading conditions are the key factors for successful profitable work in the currency market. "If a trader decides to work on the intraday basis with a small deposit, they need to apply high leverage. Otherwise, potential losses in trading currency pairs are unlikely to be offset by potential gains,"analysts at InstaForex say. Before choosing the leverage on Forex, traders need to work with a small deposit at first. This way, they will learn how to operate in financial markets and analyze the price behavior. The most appropriate leverage for this purpose is 100:1. An example Let's analyze a specific case of a trader's usage of leverage to understand what size is optimal. At first, let us take the leverage of 1:100 as an example and see how the trading statistics of an account change. To open a deal of 0.1 lots, which is equal to USD 10,000 for the EUR/USD pair, traders need to invest the whole sum if they do not apply any leverage. However, in margin trading it will be enough to put in 1/100 of this sum which is USD 100. Thus, after traders open a deal of 0.1 lots with the leverage of 1:100, they actually spend only USD 100 while USD 900 remain on balance. This sum can be used to overcome a drawdown, increase the trading volume, or open another deal. So, having a balance of USD 1,000 and leverage of 1:100 traders can buy a whole lot (100,000 of currency units), while without leverage USD 100,000 will be needed to open such a deal. What will change if the leverage is increased to 1:1,000? All conditions remain the same for an exception of a change in the leverage. In this case USD 10 will be required to open a deal of 0.1 lot which is 1/1000 of the actual sum. Just imagine what opportunities traders get when they apply leverage. Having merely USD 1,000 they are able to open deals of several market lots. For example, it is enough to invest USD 300 with the leverage of 1:1,000 to buy 3 lots on EUR/USD. What else you need to know about leverage To put aside psychological factors, we should admit that an increase of leverage on Forex can influence only the size of a deal but it does not change the risk degree. Buying 0.1 lots with the leverage of 1:100 is the same as buying the equal volume with the leverage of 1:1,000. The only difference is the size of margin. Surely, high leverage opens up new opportunities for trading, but traders should be careful and refrain from using it to the full. It does not matter whether you choose the leverage of 1:100 or 1:1,000 if you have steel nerves. But if you are a hot-headed investor, then you'd better confine yourself to smaller leverage, for example 1:50 or 1:100. This article was submitted by InstaForex.

BASICS Sat 26 Jan

How the US Dollar Index can help your trading

The Dollar Index is another tool for your trading toolbox  You don't have to be reading analysts posts or market wraps for very long before you come across references to the US Dollar Index. The US Dollar Index is a very useful tool in your trading as it can confirm a directional bias for the currency pair you are trading and also warn you of any headwinds that your trade might face before you pull the trigger. The Federal Reserve is the most important central bank in the world with the US dollar being the most traded currency in the world, comprising of around 70% of all transactions on a given day. So, having a handle on what the Dollar is doing overall on any given day is going to be a key advantage for any trader. The Dollar Index will help you do just that. So, what is the US Dollar Index? The US Dollar Index (USDX) started in March, 1973 for a value of 100.000. In February 1985 it traded as high as 164.7200 (depending on your price feed) and in March 16, 2008 it traded as low as 70.698.  At time of writing it sits around 95.32. You can see the approximate, historical  range of the Index below. The US dollar Index compares the USD to a basket of currencies The US Dollar Index is a measure of the value of the US dollar in relation to the value of a basket comprised of some of the US's most important trading partners. The Index is comprised of six foreign currencies. Due to the fact that all these countries are not the same size ,the Euro  for example comprises of 23 countries, the USD Index gives varying weight to each currency. The biggest proportion of the Dollar Index (USDX) is made up of the EURO which has a 57.6% weight. The currencies are weighted in the following ways: The Euro (EUR), 57.6% weightThe Japanese Yen (JPY), 13.6% weightThe Great British Pound (GBP), 11.9% weightThe Canadian Dollar (CAD), 9.1% weightThe Swedish Krona (SEK), 4.2% weightThe Swiss Franc (CHF) 3.6% weight It will become immediately apparent that the Index is heavily influenced by the Euro. This gives us the first clue as to how the USD Index can be useful for making trading decisions. The USDX is the Anti-Euro Index When the Euro loses values this mean the Dollar Index gains value. The nearly 60% average weighting means that the EUR/USD pair and the USDX are inversely correlated. In the chart below, since May 2018,  the EUR/USD has been steadily falling In contrast below, since May 2018, the US dollar Index has been rising. Armed with this knowledge the US dollar Index becomes an excellent indicator for the EUR/USD. At the time of writing the Index is testing the daily 200 moving average while the EURUSD is testing the daily 200 moving average. The Dollar Index can be eyed for clues as to the EUR/USD's next move The US Dollar Index is a guide for the direction of the USD in any pair Trading any pair with a USD half will be guided by the USD index, so here are a couple of key facts to keep in your mind: •If the USD is the base currency (USD/xxx ), then the US dollar Index and the currency pair will typically move in the same direction. •If the USD is the quote currency. (xxx/USD) then the US dollar index and the currency pair will typically move in opposite directions. The US dollar index and the smile theory. The US dollar index can give you a quick broad picture of the dollar and help you see what is going on with the market. The smile theory is worth mentioning since it is such a good way of mentally holding the three varying ways the dollar responds to different situations. If you look at the picture below you can see a kind of smile.  On the left hand side of the smile you have USD strength , which is when the global economy is struggling. This is where you have JPY, CHF strength and USD gains too as money is put into less risky dollars, The bottom part of the smile is where the USD depreciates on a dovish Fed. At the time of writing, in January 2019, the USD is falling with a more reserved Jerome Powell looking to the data before continuing the pace of hike rates. The right part of the smile is when the USD gains value on a hawkish fed and risk on environment. This smile theory is useful as a quick rule of thumb for understanding the dollars present position and what is likely to happen next. By getting into the habit of noticing the USD index as soon as you start trading you can speed up your analysis on the dollar and also gain invaluable insights to inform your next trading decision. ForexLive


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