My day starts with a look at the U.S. Dollar Index for two reasons. First it’s a futures contract that I like to trade but second and just as important is the insight it offers into my forex trading.
So the discussion here is not only a look at the dollar but how you gauge where the dollar in heading depending upon your outlook which is essentially your time frame.
So here’s four looks at the dollar:
The 30 minute chart with a lookback of about two weeks is showing that the current direction of the market is slightly distribution. A 30 minute time frame reflects a relatively short term psychology so if you consider that while looking at this next chart you’ll see the difference in not only direction but the overall sentiment it reflects.
The trend here is markedly down…down…down..BUT it’s heading towards what could be a double bottom at 78.33. These are insights of a longer term intraday time frame. I am not going to demand that a 30 minute chart show me these types of set ups — like the potential double bottom — your analysis will reflect the time frame you are looking at as well as the amount of data you have on your chart. This should not be random; just as I put about two weeks on the 30 minute chart, there’s six weeks on the four hour chart. I will look at roughly four to six weeks on the 180 and 240 minute time frames.
Finally we come to the daily time frame which from a risk/reward standpoint may not be realistic for all traders to manage but does reflect the widest and probably most important psychology.
The daily U.S. Dollar Index is slightly weak to neutral. While there is certainly weakness the downtrend has transitioned to more of a sideways market cycle.
Each one of these time frames of the same market, the dollar, reflects the psychology specific to that time frame. Consider this next time you hear a generalized comment like “the dollar’s in a downtrend..” and be sure to know what time frame is being talked about.