The world’s reserve currency has surged once again…
On February 20, I wrote about an imminent dollar rally. Since then, the dollar index (DXY) has climbed as much as 4.98% off its February lows.
This move is even more proof that the volatility in currency markets isn’t going anywhere.
And that’s fantastic news for currency traders. More volatility equals more opportunity.
So today, I’ll share the parameters I’m working with to trade the dollar’s next big move…
A Muddy Chart Is Revealing a Strong Trend
Sometimes a market’s chart is very clear. The direction of the trend is undeniable, and trading is smooth and effortless.
This was the case for DXY back in late February. However, now the picture is a lot muddier.
Since topping out on March 7, DXY gave back almost 50% of its gains before shooting higher.
Let’s take a look at an updated price chart of DXY to see what’s going on…
To track intermediate-term trends in the market, I like to use the 20-period moving average (MA – green line) and the 50-period MA (purple line). These indicators hold the key to DXY’s future.
After DXY bottomed in February, notice how the two MAs crossed to the upside and prices stayed above the averages as well. When a strong trend is in place, this is exactly what you want to see.
However, after hitting my first target of 105.24, prices have broken below both MAs and the 20-period MA has crossed below the 50.
Although this doesn’t mean dollar strength is completely exhausted, it does make trading the dollar slightly more complicated.
My analysis shows me that the buck is still likely to move toward higher levels. As such, my second target for DXY (107.47) remains in play.
And to manage risk on this trade, it makes a lot of sense to move any kind of stop loss just below the March 14 low of 103.44.
If the dollar breaks below 103.44, then the odds that the rally is finished would increase substantially. Such an event would likely see the buck re-test the February lows of around 101.
I expect currency markets to remain highly volatile, especially with the Fed’s most recent interest rate statement coming out on Wednesday.
If you’re trading this week, be smart. Keep your position sizing in check and focus only on the best opportunities.
Happy trading,
Imre Gams
Analyst, Market Minute
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Source: Jeff Clark Trader