US Dollar Index (DXY) vs Synthetic Currency Indices
US Dollar Index (DXY)
The price value of the US Dollar Index (DXY) is set by using the weighted method for basket. It distributes the value of certain a currency against all of its counterparts within a set time period. It is comprised of six different currencies (EUR, JPY, GBP, CAD, SEK, CHF), with the EUR playing the dominant role in the calculation.
Example of DXY Index Calculation:
| COUNTERPART IN THE PAIR |
WEIGHT IN THE INDEX (USDX) |
| EUR |
0.576 |
| JPY |
0.136 |
| GBP |
0.119 |
| CAD |
0.091 |
| SEK |
0.042 |
| CHF |
0.036 |
Value of fixed coefficient 50.143448112
DXY = 50,14348112 * EURUSD^-0,576 * USDJPY^0,136 * GBPUSD^-0,119 * USDCAD^0,091 * USDSEK^0,042 * USDCHF^0,036
Synthetic Currency Indices
Beside the standard US Dollar Index (DXY), Axiory also offers 7 so-called synthetic currency indices. At Axiory, you can spot them by seeing the letter X at the end of the symbol. These include all major currencies, specifically: JPYX, USDX, EURX, GBPX, AUDX, CADX, CHFX.
The major difference between the synthetic currency indices and the official index such as the US Dollar Index (DXY), is that Axiory takes into account each and every currency pair in which the respective currency is traded. Therefore, they are not comprised of only the six chosen currencies as is the case with DXY.
Axiory uses a complex formula to calculate the value of each available index. As you may have noticed, for US Dollar, Axiory offers both the standard US dollar Index and a synthetic one.
Here is how they look in comparison:
In many cases, their value is quite comparable. It is up to the trader to decide which one is better suited for their trading strategy.
How Can They Be Used?
In Axiory MT4 terminals, the currency pairs are shown among the other symbols (if you can’t see them, please try right-clicking on the Market Watch and selecting Show All). However, as we stated above, they cannot be traded and serve as an evaluation tool for the current strength of the currency.
Below are two examples where currency indices might be useful as a tool for traders.
1. Using Downtrend and Uptrend on Two Different Indices to Open a Position
For this example, we have chosen the Australian Dollar index (AUDX) in combination with the US Dollar index (USDX).
On the picture above, we can see that the strength of the Australian dollar is in a downtrend on the weekly chart. This gives us some idea on how the currency is doing in comparison with other currencies according to the formula above.
Now, let’s take a look at the US Dollar Index (USDX).
Chart shows us a strong uptrend for US Dollar.
Assuming we believe that the trend will hold and we would like to try to capitalize on it by opening a short position on AUDUSD, we could wait for the price to reach the upper part of a newly formed downward channel to try to enter at the best price.
To correctly set-up an exit from this position, we could use basically any touch at the bottom of the channel, depending on the risk appetite and any other used analysis that traders choose.
2. Using a Long-term Channel to Help Predict Movement After a Break-out
In the second example we're using the JPYX index to enter a trade. On the picture below, you can see that the JPY has formed a channel which has been going on for longer than 9 months.
The JPY has experienced a crash in January 2019 that caused a break-out which could present us with a trading opportunity. If we believed that the long-term strength of the JPY will come back to the values it held for almost a year, we could’ve opened a long position on USDJPY immediately following the crash.
As we can see, the channel didn’t hold as nicely in 2019, as it did during 2018. However, the JPY still reversed enough.
DISCLAIMER: The information and charts displayed above are considered to be examples of potential cases of these featured tools. In no way should the above information be considered or constitute as trading advice.