How to Trade the US Dollar Index
The US dollar is arguably one of the most important currencies in the world. The movement of the dollar is widely watched by traders, fund managers, corporations and governments. It is also why the US dollar index - a measure of the value of the US dollar against a basket of foreign currencies - is one of the most important tools in a trader's arsenal.
In this article, you will learn how the US dollar index works, why it's important to all types of traders and investors, and how to get started with a dollar index trading strategy.
Table of Contents
What is the US Dollar Index
The US dollar index, also known as just 'dollar index' or the 'dollar spot index', measures the performance, or value, of the US dollar against a basket of foreign currencies. The index itself is published by the Intercontinental Exchange (ICE) and was first developed in 1973 by the Federal Reserve.
At the time it was designed to help view how the US dollar was performing relative to the currencies of America's key trading partners which included the:
- Eurozone (now the Euro)
- Japanese Yen
- British pound
- Canadian dollar
- Swedish krona
- Swiss franc
However, the weighting of each currency within the dollar index is different. According to the ICE FX Index Methodology, the currency weighting is as follows:
|
Currency |
Weighting in US Dollar Index |
|
Euro |
57.6% |
|
Japanese Yen |
13.60% |
|
British Pound |
11.90% |
|
Canadian Dollar |
9.10% |
|
Swedish Krona |
4.20% |
|
Swiss Franc |
3.60% |
As you can see, the index is heavily weighted towards the Euro currency, or the EUR.USD exchange rate. While not a perfect correlation this means that as the US dollar index falls, the EUR.USD exchange rate rises.
The Federal Reserve continues to maintain a version of the dollar index called the 'trade weighted dollar index' which includes a bigger selection of currencies than the ICE dollar index. However, the ICE US dollar index is still the most widely used by analysts and traders.
Having the ability to view different markets such as the dollar index and the EURUSD can prove to be quite important in markets which are now becoming more and more connected in a globalised society. Understanding which direction the US dollar could move next could help in trading other asset classes such as gold and oil which are priced in US dollars.
How to Trade the US Dollar Index
The dollar index was initially created to measure the value of the US dollar against America's biggest trading partners. It is now widely traded by companies looking to hedge their US dollar exposure, as well as speculators looking to profit from the rise or fall in the US dollar.
To do this, participants can buy or sell the US dollar index futures contract listed on the Intercontinental Exchange as they are the ones who maintain and regulate the index - much like the New York Stock Exchange would maintain and regulate the buying and selling of stocks and shares in companies like Apple.
What is the US dollar index futures contract?
A futures contract is an agreement by one party to buy, or take delivery of, a product like a currency or commodity, at a fixed future date and price.
The Intercontinental Exchange helps individuals to buy and sell the US dollar index futures contract, among other instruments like oil and natural gas. Individuals can trade the index via a futures broker who connects them to the exchange via their trading platform.
Futures contracts have their unique symbols. For example, the symbol for the US dollar index futures contract is DX. However, there will also be a code written after the symbol which details the month and year the futures contract will expire. Typically, all futures contracts across the different futures exchanges have quarterly expirations with a symbol code to state the expiration month.
In the case of the US dollar index futures contract, it is:
- March (H)
- June (M)
- September (U)
- December (Z)
This means that any open positions may be subject to liquidation when the current contract expires and moves to the next one. There are certain advantages and disadvantages to trading futures contracts which you can read more about in the CFD Trading vs Futures Trading article. Admirals offers users the ability to trade the US dollar index futures contract via a product called CFD, or Contract for Difference.
CFDs allow traders to go long and short on a particular market, and thereby potentially profit from rising and falling markets. CFD traders can also trade using leverage which means you can control a large position with a small deposit. You can learn more about leverage trading and the risks involved in the What is leverage in Forex Trading? article.
How to view the US dollar index chart
To view the US dollar index live chart in your MetaTrader platform provided for free by Admirals, follow these next steps:
- Open your MetaTrader trading platform.
- Open the Market Watch window by selecting View from the tabs above and then Market Watch, or by pressing Ctrl+M on your keyboard.
- Right-click on the Market Watch window and select Symbols.
- Search for your symbol, such as the US dollar index.
- You will now be able to see the US dollar index futures CFD contract specification which details, among other things, the expiration date of the currency contract being traded and the opening and closing times.
- After clicking OK, this will add the market to your Market Watch window.
- From the Market Watch window, you can simply select the US dollar index futures CFD symbol which will start with #USDX and then drag it onto the chart.
You may have noticed that in the above screenshot, the symbol code for the US dollar index futures CFD varies. The index's symbol from the InterContinental Exchange 'DX' as well as the month and year the current contract expires, using the codes discussed earlier on. The Admiral's code also has the US in it to highlight it is the United States dollar.
Fortunately, through the MetaTrader trading platform, Admirals makes it easy to identify when the contract you are trading expires so you don't have to keep track of codes and symbols like futures traders do. This gives you more time to focus on your trading.
So now you know how to view the US dollar index chart, how do you trade it? Let's take a look at the mechanics of a buy or sell trade before we dive into a US dollar index trading strategy you can start using today.
Placing a trade on the US dollar index futures CFD
To place a trade on a market you first need to be on the chart of the market you want to trade. If you followed the steps above your trading platform will already be showing the US dollar index chart. To place a trade, you first need to open up a trading ticket using the steps below:
- Right click on the chart.
- Select Trading.
- Select New Order, or press F9 on your keyboard.
- A trading ticket will open for you to input your entry price, stop loss and take profit levels and unit size (volume).
Now you know how to place a trade on the US dollar index, the next question is when do you trade it? The decision to buy or sell any market is usually determined by your trading style and trading strategy. Before you even consider dollar index investing it may prove beneficial to identify how you will produce a dollar index forecast to trade from. Let's have a look at the options.
Research & Analysis of the US Dollar Index
When it comes to US dollar index investing two types of analysis can help in deciding when to buy or sell:
- Technical analysis. This involves analysing the movement of price to identify patterns of repeatable behaviour. Many traders will also use technical indicators on the US dollar index's historical data to find clues on which price levels the market could turn. You will learn more about this in the US dollar index trading strategy example further down the article.
- Fundamental analysis. This involves analysing US dollar index news announcements to forecast trends and which direction the market could move next. The most relevant US dollar index news announcements will be economic data from the United States such as the release of employment numbers, central bank policy, retail sales and others. You can stay up to date with all the upcoming US dollar economic announcements by using the Admirals Forex Calendar.
Most traders will use a combination of both technical and fundamental analysis. However, short-term traders such as day traders, who only hold trades for minutes or hours, will be more focused on a trading strategy that is predominantly focused on just technical analysis. This will become more evident when we go through a US dollar index trading strategy in the next section.
If you would like to learn more about technical and fundamental analysis then why not register for the Admirals Trading Spotlight webinar? In these free, live sessions, taken three times a week, our professional traders will show you a wide variety of technical and fundamental analysis trading techniques you can use to identify common chart patterns and trading opportunities in a variety of different markets.
To reserve your spot in these complimentary webinars, simply click on the banner below:
A US Dollar Index Trading Strategy Example
There are many different ways to trade the US dollar index. Some traders will use the price movement of the US dollar index to trade other US dollar-related markets such as currency pairs like EUR.USD, GBP.USD or AUD.USD. They may also use the dollar index to trade on commodity markets that are priced in US dollars, such as gold or oil.
One of the simplest ways to get started is to treat the US dollar index as any other tradable market. For example, many Forex traders like to use price action patterns to help identify turning points in the market and, therefore, areas to buy and sell.
A popular price action pattern is the 'engulfing candlestick pattern' of which there are two types: the bearish engulfing candle pattern and the bullish engulfing candle pattern.
The bearish engulfing candle pattern, as shown above, is based on two candlesticks. The most important candle is the second one which engulfs the range (high to low) of the previous candle. On the second candle buyers push the market up, breaking the high of the previous candle. However, during the same candle sellers step in and push it all the way down breaking the low of the previous candle and closing lower. This represents a significant shift in momentum to the downside.
The bullish engulfing candle pattern, as shown above, is based on two candlesticks. The most important candle is the second one which engulfs the range (high to low) of the previous candle. On the second candle sellers push the market down, breaking the low of the previous candle. However, during the same candle buyers step in and push it all the way back up breaking the high of the previous candle and closing higher. This represents a significant shift in momentum to the upside.
Identifying Engulfing Candles on the US Dollar Index Chart
The price chart below is of the 4-hour timeframe. The yellow boxes show examples of bearish engulfing candlestick patterns and the blue boxes show examples of bullish engulfing candlestick patterns. In most cases - but not all - the market did indeed continue in the direction of the bullish or bearish engulfing candlestick pattern.
A screenshot of the MetaTrader 5 trading platform provided for by Admirals, showing the US dollar index futures CFD chart with yellow boxes showing bearish engulfing candlestick patterns and blue boxes showing bullish engulfing candlestick patterns. Disclaimer: Charts are for illustrative purposes only. 13 Dec 2023.
Traders can use additional technical tools and analysis to further refine the basic engulfing candlestick pattern. For example, adding a moving average of price can help to identify the trend and to only trade in the direction of that trend. Moving averages are often used to help identify who is in control of the market, buyers or sellers.
To demonstrate this, the chart below has a 20-period exponential moving average of price, as shown by the wavy blue line:
In the chart above, some of the clearest - but not necessarily the best - trends are when price has consistently remained above or below the moving average line. Using this, traders can further refine their trading rules as such:
- Rule 1: Identify bullish engulfing candlesticks only when price is above the 20-period exponential moving average.
- Rule 2: Identify bearish engulfing candlesticks only when price is below the 20-period exponential moving average.
Now let's update the chart in accordance with rule one and two above:
The chart above highlights occurrences of both rule one and rule two. While there are less possible trading setups, the probability of the market moving in the direction of the moving average and engulfing candle setup is much higher. There will be occasions where your chosen trading rules will be less effective and result in losing trades. This is why risk management and using a stop loss will prove to be beneficial in the long run.
This strategy has not been tested historically for its effectiveness, it merely serves as a starting point to build upon. Traders can take this one step further by experimenting with different moving average values, learning additional price action patterns in the Admirals Educational library, adjusting the timeframes or by experimenting with other US dollar-related markets.
Why Trade the US Dollar Index with Admirals?
If you trade the US dollar index futures CFD with Admirals, you can:
- Use leverage of up to 1:500 for Professional clients and up to 1:30 for Retail clients. This means you could control a large position with a small deposit. You can learn more about the benefits and risks in the 'What is Leverage in Forex Trading?' article.
- Trade with a well-established, highly regulated company including regulation from the UK's Financial Conduct Authority, the Australian Securities and Investments Commission, the Cyprus Securities and Exchange Commission and the Estonian Financial Supervision Authority.
- Access the fastest and most secure trading platforms from MetaTrader for PC, Mac, Android and iOS operating systems.
- Benefit from our negative balance protection policy for peace of mind.
- Trade the US dollar index futures CFD commission-free!
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FAQs on Trading the US Dollar Index
Can you trade the US Dollar Index?
Some brokers do allow you to trade the US dollar index. This could be by trading futures contracts, or CFDs on the futures contract. Both products allow you to trade the US dollar index long and short, potentially profiting from rising and falling prices.
How do you short the US Dollar Index?
To short the US dollar index simply select the instrument from your broker's trading platform. Initiate a 'sell' position and be sure to use a stop loss to protect you if the market turns the other way.
About Admirals
Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
