Using USDX or other pairs to Confirm an Entry

Discussions about trading the Forex markets.
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Kiwi
Roundtable Knight
Roundtable Knight
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Joined: Wed Apr 16, 2003 1:18 am
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Using USDX or other pairs to Confirm an Entry

Post by Kiwi » Tue Sep 28, 2004 12:04 am

This is something I posted in a forum of (semi?)discretionary traders and I thought it might be interesting to discuss in a forum of mechanical traders.

Let me propose an idea for discussion. This is not so much a high probability setup as a proposal to simplify your trading and perhaps reduce your portfolio risk.

As Eliot points out, there are a number of confirming indicators for the US stock indexes. These include tick, trin, and your choice of the other indexes. The correct combinations do appear to improve your probabilities.

IMO, because of this people search for similar "confidence enhancers" in currencies. My idea is that the search for confirmation in currencies is pointless.

When you trade EuroFx you are trading up movements in the Euro against down movements in the US dollar (or vice versa for shorts). When you trade the SF you are trading up movements in the Swiss Franc against down movements in the US dollar. Similarly with GBP (cable). The dollar index is just the up movements of a basket of currencies (Euro, JPY, etc) vs the US dollar. FYI Eliot you can create a composite of the other CME futures that moves exactly the same way as the USDx just by adding them together in the same proportions used for the USDx (I built one for Sierra and I am sure it already exists for ensign).

Why is the dollar index (or SF or BP as confirmation of Euro) a waste of time?

Simply because most of the confirmation is just an indication of the US dollar part of the movement. If the euro and the sf stay neutral then both will rise if the US dollar falls. So what does it prove if both of them rise ... it proves that there is a rising component because of a fall in the "value" of the USD.

So if you are waiting to trade the Euro until the SF, USDx, or the GBP confirms you will miss out on trades that are due to a change in the euros "relative value" and only get the trades that were caused by a change in the US dollar.

Much better IMO to take the euro trades when they come or take the GBP trades when they come .... but .... be aware that if the movement is caused by the USD component then these are correlated trades so you don't want to take two full positions. Take two partial positions instead.
OK. I hope that that is food for thought and well enough expressed that my meaning comes through. Open for debate.

I will argue about volume in currencies at a later date. One idea at a time :-)

Kiwi

(disclosure: I trade Eurofx on a 5minute timeframe with some trades entered on a 1 minute timeframe).

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