Evaluating Forex Trades by Brian Twomey
Will the currency pair you are trading reach your target? Here’s how to determine uptrends, downtrends, or range trades.
any traders evaluate a currency pair and make a trading decision based on their observation of what the indicators say about that pair. In many instances, these indicators are short-term tools and can provide little knowledge of whether that pair will reach its destination or your objective. Analyzing charts in multiple time frames is an excellent approach in order to evaluate pairs, but again the question arises: Will that pair reach its intended destination?
Since markets are so closely aligned together, there are other methods that traders should be aware of to examine an uptrend, downtrend, or range trade. This article will evaluate trading decisions through a multitude of currency pairs using currency cross-rates, dollar-opposite trades, dollar-similarity trades, and the use of other markets such as gold, oil, US Treasury bonds, and US stock markets.
Using the dollar index
Any trade should first be evaluated based on the US dollar index, since that index is the most powerful determinant of direction for all other major currency pairs. In Figure 1, note that the index has been in an uptrend since September 2008. If you apply the Fibonacci indicator, you can determine that the dollar index on a daily chart is also trading and has been trading just above the 0.618 level. Does the index retrace or hit its upper extensions? The answer may mean the difference between a good or bad trade with many pips of profits or losses. There are a number of ways to evaluate this situation.