Article Summary: The Dow Jones FXCM Dollar Index is a great asset used to determine USD direction. Today we will review trading breakouts with the current USD trend.
The USD (US Dollar) has been having an excellent year of strength, advancing against most major currencies pairs. This move can be tracked using the Dow Jones FXCM Dollar Index which compares the EURUSD, GBPUSD, AUDUSD and USDJPY using an equal weighted average. So far for the 2013 trading year the index has advanced over 7.9% after breaking through key resistance at 10,000. Savvy traders using this index for guidance can then plan for breakouts on the USD pair of their preference. Let’s look at an example.
Learn Forex – USDollar Daily Trend
(Created using FXCM’s Marketscope 2.0 charts)
Below we can see a one hour chart of the USDJPY which is one of the four components of the Dollar Index. In line with the index the USDJY has also been advancing through the course of 2013. Traders will use this information to buy the USDJPY on breakouts to higher highs.
One method of trading breakouts is to wait for a period of consolidation. This is a time displayed on the graph where trending markets slow and refrain from making new highs or lows. Below we can see consolidation displayed in the form of a triangle pattern. Support on the USDJPY can be seen as rising with a series of lows getting higher. This coincides with a drop in resistance with the creation of lower highs. As prices converge between these two points, traders can begin planning for a breakout.
Learn Forex – USDJPY Consolidation
(Created using FXCM’s Marketscope 2.0 charts)
Since our bias is towards the USD increasing in value, traders will look to buy the USDJPY on a breakout of resistance. The easiest way to take advantage of a breakout is through setting an entry order outside of resistance and above the previous high. In the event that price breaks through our pre-defined barrier our order will execute, positioning us to take advantage of the USDollar trend.
As with any breakout trade stops should be placed to exit positions in the event, price moves against the primary trend. When trading a breakout above resistance, a natural place to put stops will be below support or a previous low. Once risk is assessed through the use of a stop loss, traders can finally pinpoint profit targets by using a risk reward ratio of 1:2 or better.
---Written by Walker England, Trading Instructor
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.
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