DXY vs. USDOLLAR - Which One Should You be Using??? DXY
The most common index used by many traders would be DXY. This is considered to be the go to index in interpreting USD strength against the other major currencies. When looking at this particular index, the first thing we should know is, what currencies are actually in the basket and how it is calculated. Below are the currencies included and the percentage weighted to each.
EUR - 57.6%
JPY - 13.6%
GBP - 11.9%
CAD - 9.1%
SEK - 4.2%
CHF - 3.6%
As you can see from these numbers, the standard dollar index is very heavily weighted towards the Euro, making up almost 60% of the entire basket. This gives a misleading interpretation of the overall strength of the USD as it compares it mainly to the Euro, almost ignoring the price action happening with other major currencies.
USDOLLAR
Many traders do not even know there is a second, arguably more reliable index available to them. This basket was created back in 2011 by FXCM and is weighted differently with a slight variation between the currencies involved. Below are the currencies included and the percentage weighted to each.
EUR - 25%
GBP - 25%
AUD - 25%
JPY - 25%
As you can see, EUR does not carry as much weight in this basket. The weight between the 4 currencies that are included in the calculation are evenly distributed giving a better interpretation to the overall strength of the USD.
EURUSD
Now finally, the last piece of the puzzle. Let's take a look at what this would have meant for you if you were trading EURUSD. Based on the chart itself, it appears that it has not broken the trend yet, which would align with DXY as well. Therefore, many traders would not have gotten involved in this trade or at least would not have seen as much weakness in the USD as what was presented in the USDOLLAR chart. If someone was swing trading long-term and using the USDOLLAR index to determine direction for the USD, this trader would have been able to start scaling in to their trades 3 months earlier and banking an extra 400 pips on this move.
Can this be used for day trading???
The answer to this question is very simply, yes!... Of course this index can be used for intraday trading just as well as DXY. Price action even on lower timeframes will be displayed with slight variations in certain swing highs and lows that can help determine possible entry points in the market. Another benefit of using the USDOLLAR index is that it trades 24/5, the same as every other currency pair, therefore there will be no gap displayed in price as you often see with DXY.
