Mark Wogan: Today´s eurusd levels and the USDx

Good morning traders. 

Last week I said I´d post a bit more information on how I use the dollar index (USDx) to help inform my eurusd trades.

So before I get into today´s levels here goes.

For those of you who aren´t aware the USDx is comprised of the following weighted currencies. (click to expand).

What is instantly obvious is that the euro comprises by far the biggest slice of the index. Hence it has a strong inverse correlation with the eurusd. This provides us with a great indicator when we are trading the eurusd.

Here´s how I use it.

There are two main aspects that I use when trading

1 = Look at key levels on the USDX

2 = Look for divergence between the USDX and the eurusd.

1 Key Levels

It should be pretty obvious that when the USDx is moving into a key level of S or R we need to be looking at the eurusd to see if it also is at a decent S or R level. If it is, there is a good chance it will fade the level either up or down. Therefore, the two coming into levels at the same time adds more weight to the success of the trade.

2 Divergence

The second thing I look for is divergence. What I mean is are the two moving in opposite directions around a trend line.

For example if the USDx is making higher lows when the eurusd is making higher highs – there is divergence between the two as you´d expect the eurusd to be making lower highs while the USDx makes higher lows. This suggests to me that they could be out of step. In such cases given that there are other reasons to suggest such a trade, I look to fade the eurusd move. The same applies in the opposite direction.

You have to be aware that divergence can happen which does not imply that the eurusd is always out of line, but it is something definitely worth taking into account.

In itself a divergence is not enough to take a trade but when there is further reason to trade the eurusd, divergence with the USDx adds confluence.

The image below from last week provides a great example. The left chart is the USDx and the right the eurusd.

You can see that the USDx is making higher lows while the eurusd is making higher highs. This should get you thinking why are the two going in opposite directions?

Given that we had a big fig level at 1.14, that we were waiting for the FOMC later in the day, the G20 over the weekend and the fact that the eurusd had a big move the previous session, this divergence added to the decision to trade the eurusd short at 1.14.

This type of divergence occurs on all time frames but I like to look for it on the hourly chart. However, I suggest you take a look yourself, find examples and blend it into your trading. I find it a really useful method!

Hope the above helps.

Right whats up for today?

The Daily Chart

Nothing further to add from yesterday. We are still looking for a push up to test 1.1450 and a close above to provide a springboard for higher.

We had 4 FOMC members out on the wires yesterday and it seems to be becoming clear that the Fed are moving from a set rate path theme to one which is more data dependent. This is a nuanced change in language which on the face of it doesn´t help to drive the USD higher.

The Hourly Chart

Support & Resistance levels marked up and ready to roll.

By the way, yesterday if you ´blindly´traded my support levels from the H1 chart (i. e. you didn´t use the lower time frame charts to finesse your entry)  you may have had a loss at S1 during the London session but you should have been in overall profit if you traded S2 as well.

Lets say you lost -10 going long S1. If you traded S2 with the same stop loss you should have been able to clear around +30 during the course of the day. Ergo hopefully you should have banked +20 for the day. If you held onto your position or a portion of it overnight you would easily have improved on that.

Sure, it depends on your money management (and I have strict rules for this strategy) but I hope its becoming clear that the levels I post consistently provide good levels to look for trades.

Ok, lets go!