How to Trade on the Forex Market Using the U.S. Dollar Index
The forex market is one of the most heavily traded markets in the world. Any nation state can issue and trade currency; however, there are only a few major currencies which make up the bulk of forex trading. Forex investors use indicators like the U.S. dollar index and moving averages to help provide information on the general direction of U.S. currency. They can also use this information to identify buy and sell signals.
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Instructions
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Understand that the U.S. dollar index is a measure of the relative strength of the U.S. dollar in comparison to other major currencies. It is calculated using a trade-weighted index methodology, which is similar to the way most market indexes are calculated.
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Understand how the index is calculated. The index factors in the exchange rates for six major world currencies: euro, yen, cad, pounds, krona, and Swiss francs.
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Understand how to interpret the index.The index was started at a base of 100 in 1973. An index value of 130 suggests that the U.S. dollar has increased by 20 percent in value since 1973.
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Use the U.S. dollar index value to help provide information about the direction of a particular currency. Look at the 52-week high and low for the index. Take note of the date of the high and low and where they are in contrast to the current price.
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Chart a moving average of the index over the past three months and then chart another moving average over six months and 12 months. The three-month chart will be more volatile than the six-month; likewise the six-month chart will be more volatile than the 12-month chart.
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Use the moving average charts of the index to find buy and sell points. When the three-month chart breaks out of the six- or 12-month moving average line it can be used as a signal to enter or exit the market depending on your strategy.
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