The Dow Jones FXCM Dollar Index Basket (US Dollar) was designed to reflect the strength and weakness of the US Dollar relative to a basket of currencies. Currently, the USDollar is trading off of its October 4th high at 10,134 while creating a higher low at 9,443 on October 27th. As price attempts to make higher highs, trend and breakout traders can begin to look for entrys on the currency basket.
Fundamentally, the dollar has rallied on its status as a safe haven currency. During a “Risk Off“ environment, the USD traditionally rallies on purchases of US paper which is deemed as a relatively safe investment. This has been occurring on a frequent basis as the European debt crisis continues to unfold. As recent headlines suggest the crisis to remain an issue, we will begin looking for opportunities to buy the USDollar.
Taking Price in to a 4Hour chart we can better see the USDollar moving in a wedge pattern. Resistance is firmly formed at 9,810 by matching up the October 13th and 18th highs. Despite rallying strong for the month of November, the USDollar has yet to break resistance to form new highs. Breakout traders will see this to set entry orders above this resistance level anticipating price to break higher highs.
My preference is to buy the USDollar on a break of resistance. Entry orders should be placed over 9,820. Stops should be placed below support at 9,720. Limits should look for a minimum of 100 pips at 9,920 for a clear 1:2 Risk/ Reward scenario.
Alternative scenarios include price trading under resistance and breaking under the 9,665 low.
---Written by Walker England, Trading Instructor
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