U.S. Dollar Index, a must-use indicator for all Forex traders

The higher the index is, the more popular USD becomes.

The U.S. Dollar Index is an index that represents the value of the US Dollar relative to a basket of foreign currencies including Euro, Japanese Yen, Pound Sterling, Canadian Dollar, Swedish Krona, and Swiss Franc . The index is equal to the outcome of a geometric average, rather than an arithmetic average, of the constituent currencies. And here is a specific equation:

U.S. Dollar Index =50.14348112 × EURUSD(-0.576) × USDJPY(0.136) × GBPUSD(-0.119) ×USDCAD(0.091) × USDSEK(0.042) ×USDCHF(0.036) In this equation Euro takes 57.6% in weight which is the second significant factor. When the index goes up, the U.S. dollar is more appreciated than the other currencies. If the index goes in the opposite direction, other currencies such as Euro will be demanded by the market.

Caught in the middle

The index is more than an indicator showing a basic market outlook of USD. It also provides a daytrader with trading signals. Daytraders always face a tradeoff between doing nothing for today and trading without any reference. It happens when no significant economic and political news is released. And the price movement in the Forex market is in a flat fashion.

Screening the currency pairs by U.S. Dollar Index

It is hard for daytraders to make a profit. In this case, the U.S. Dollar Index is a practical indicator to help traders find less dismal currencies. If the U.S. Dollar Index is found keeping increasing constantly but EURUSD goes up as well, EURUSD will be a nice choice. There is a good chance that EURUSD will keep the same pace of other currencies. But I am not saying that the EURUSD is going to regress for a hundred percent sure. U.S. Dollar Index is not a forecasting indicator but merely an outlook of the current Forex market.

U. S. Dollar Index is designed for many purposes, and we will discuss other basic function of the index in the next article.

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