Classic trading is a speculative trading of a particular currency pair using fundamental analysis (news trading) and the use of a technical indicator. If we draw an analogy with the stock market, it is an analogue of securities trading. But in the stock market there are also indices that are aggregated by its index as a whole or its individual segments. There is something similar in the foreign exchange market – the currency index.
What is a currency index
A currency index is a value that shows the ratio of the price of a currency in relation to not a single other currency (as in a currency pair), but in relation to a basket of world currencies. The basket is formed of several freely convertible currencies, which have their share depending on the degree of the country’s participation in foreign trade.
The method of calculating the currency index is constant, but it can be revised and changed (USDX has changed 2 times in the entire history of existence). The calculation principle is a geometric weighted basket of several currencies. For example for:
- USDX (dollar index): EUR – 57.6%, JPY – 13.6%, GBP – 11.9%, CAD – 9.1%, SEK – 4.2%, CHF – 3.6% .
- EURX (Euro index): USD – 31.55%, GBP – 30.56%, JPY – 18.91%, CHF – 11.13%, SEK – 7.85.
On the stock market, traders are presented with the opportunity to trade futures on the US dollar currency index. For example, on the intercontinental stock exchange, ICE is presented under the DX ticket. Currency traders can also use this tool:
- USDX derivatives are used as an insurance tool against the sharp movement of the US dollar against other currencies of the basket.
- This is one of the indicators by which investors analyze the general state of the global foreign exchange market. It shows how much the trend in one country is stronger compared to other countries (if the dollar rises and the euro falls against other currencies, you can see on the chart which movement is stronger).
- USDX is used to make money in other markets. As practice shows, most often the direct correlation of the currency index is observed with the stock indices of Dow Jones, S & P 500 and inverse with gold and oil prices.
Most often, trading is conducted on USDX, which is used as an indicator along with average moving averages. Another option is to use divergence. When the chart shows a discrepancy (different directions) between the index and the currency pair from the basket, then with a high probability, the currency pair will soon change its direction in the direction of the index. That is, the index in this case is the main orienting tool.
Perfect this tool is difficult to call. For example, about 1/5 of the US trade turnover falls on Mexico, but for some reason its currency is not included in the US index basket. But there are no ideal indicators, therefore we recommend it to you as an analytical indicator in trading in any markets. We invite everyone to discuss currency indices in the comments!