The US Dollar Index futures contract may not be a particularly heavily traded instrument in comparison to other currency futures, but despite that fact it is very widely used by traders to help identify opportunities to buy and sell other instruments.

Let us look at some examples of this reverse correlation by examining the relationship between the US Dollar and the price of Gold.

Typically, if the Dollar is going up, it offers traders an opportunity to short Gold futures. Likewise, if the Dollar is falling, this is often a good time to buy Gold. When examining technical analysis charts to seek out trading signals, if you look at the price of Gold Futures in isolation, trading signals might not be too clear. However, when you overlay the DX Futures price charts and compare the two, some signals immediately become much stronger. Experienced traders will know exactly what to look for when comparing these two charts, in terms of gaps, patterns and trends.

Technical analysis techniques like these are not rocket science, they can certainly be learned, even by those who are relatively new to trading. There are some very simple patterns that can be learned, such as support and resistance points, double tops, head & shoulders, gap up/gap down, breakouts and trends. Of course, many of these patterns are highly interpretive, so if you get a group of technical traders together in the same room, no doubt they would have many disagreements about the exact meaning of each pattern, but that is what makes markets – for every buyer there is a seller!

Coming back to our original point though, if you are trading Gold Futures, keep your eye on the US Dollar index too because it could enable you to time your trades better.

Happy trading!

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