US Dollar Index Trading Strategy

US Dollar Index Trading Strategy Backtest and Futures Example

U.S. Dollar Index futures offer an easy way to trade the U.S. Dollar Index (USDX or DXY), which is a measure of the value of the US dollar relative to a basket of the currencies of U.S. most important trade partners — euro, Japanese yen, British pound, Canadian dollar, Swiss franc, and Swedish krona. To trade this index futures contract, you need a U.S. Dollar Index futures strategy. What is it?

A U.S. Dollar Index futures strategy refers to the trading method you can use to profitably trade the U.S. Dollar Index futures. The U.S. Dollar Index futures are futures contracts with the U.S. Dollar Index as the underlying asset. It is a tradable, legally binding agreement to exchange the value of the index on a future date. Trading on ICE futures US, the contract is physically settled and offers a way to hedge your exchange rate exposures or simply speculate on the exchange rate market.

In this post, we answer some questions about the U.S. Dollar Index futures strategy and we also make a backtest.

What are U.S. Dollar Index futures?

The U.S. Dollar Index futures are futures contracts with the U.S. Dollar Index as the underlying asset. It is a tradable, legally binding agreement to exchange the value of the index on a future date. It tracks the moves in the value of the US dollar relative to a basket of world currencies. The contract trades on ICE futures US for 21 hours a day, and it is physically settled on expiry.

This ICE U.S. Dollar Index (USDX) futures contract is a leading benchmark for the international value of the US dollar and the world’s most widely-recognized traded currency index. Trading the index futures offers a way to hedge against the risk of a move in the dollar, diversify your portfolio into the foreign exchange market, or simply speculate on the exchange rate market.

What is a U.S. Dollar Index futures strategy?

A U.S. Dollar Index futures strategy refers to the trading method you can use to profitably trade the U.S. Dollar Index futures. This strategy may include using technical or fundamental indicators to analyze the market in order to determine an exact entry point.

You must have a solid trading strategy if you want to profit from trading the U.S. Dollar Index futures. Your U.S. Dollar Index futures strategy should include precise entry and exit points, risk management, and position sizing techniques. You may trade this strategy for a variety of reasons, including speculation, hedging, diversification, and arbitrage trading.

U.S. Dollar Index Trading Strategy – Backtest And Trading Rules

We regard the forex market as perhaps the most difficult market to trade. Sadly, it’s also the market that most retail traders start with, most likely because they are undercapitalized and forex brokers offer very low margins, even up to 50:1. In a previous article we wrote about 12 reasons to avoid the forex market

Let’s give you an example of a backtested trading strategy with specific trading rules. This is a trend following trading strategy.

As we have mentioned earlier, we strongly recommend backtesting. If you are unsure or uncertain what is is, please read our long backtesting guide with pros and cons.

The backtest is performed vis DXY – the USD index, but we trade EUR and USD. 

The trading strategy is simple and has the following trading rules:

THIS SECTION IS FOR MEMBERS ONLY. _________________ Click Here To Get Access Click Here To Get Access To Trading Rules

The result of the trading strategy can be seen  in the equity curve below:

As you can see, such a simple trading strategy has worked well for a very long time (the backtest is from May 2003 until today). The forex strategy has its drawdowns, but new highs happen not long after a mild drawdown. 

The CAGR is 4.55%. This won’t set the world on fire, but it’s still very good if you can use some kind of leverage. And the best part is that the results are completely independent and uncorrelated to the stock market, which makes it very good for strategy diversification. 

But what if we change the value of the only parameter in this forex trading strategy? Does it work with other values, or is this strategy just a result of sheer luck and randomness?

There is only one way to find out, and that is via trading strategy optimization and evaluation to get more statistics and data to measure its performance. 

We backtested the strategy performance ranging from values ranging from 3 to 200. Here are the compounded results:

As you can see, the strategy performs well when the values are lower than 50. However, its peak performance is achieved when the values are on the short side – less than 10. 

If you are a Python coder, we provide you with the full code here:

THIS SECTION IS FOR MEMBERS ONLY. _________________ Click Here To Get Access Click Here To Get Access To Trading Rules

What is the seasonality of U.S. Dollar Index futures?

Seasonality in the market refers to patterns in the price of an asset that are frequently repeated at specific times of the year (months and seasons). These patterns, known as the market cycle, are usually observed over a longer period of time, such as months or quarters of the year.

U.S. Dollar Index futures strategy
Source: Equity Clock

From the seasonal chart above, you can see that the index performed better in the first quarter of the year than in any other period.

What moves the U.S. Dollar Index What affects the U.S. Dollar Index the most?

The most common factor that moves the index is the economic reports from the countries whose currencies are part of the index, especially the US and EU. The reports with the most impact include:

  • Interest rates and policy statements from the Federal Open Market Committee (FOMC) of the Federal Reserve and the European Central Bank
  • Inflation-focused reports, such as the consumer price index and the producers’ price index
  • Growth reports, such as the GDP, manufacturing PMI, services PMI, and retail sales
  • Reports about the balance of payments, such as current account and trade balance reports
  • Consumer sentiment reports

Other factors include geopolitics, global crises, and natural disasters.

How are U.S. Dollar Index futures traded?

The U.S. Dollar Index futures contracts are traded on ICE Futures US from Sundays to Fridays, from 8:00 PM – 5:00 PM ET the next day. Open on Sunday night is 6:00 PM ET, with Pre-Open at 5:30 PM ET. Monday to Thursday, the Pre-Open is at 7:30 PM ET.

The contract comes in the March/June/September/December quarterly expiration cycle. One full contract unit is equivalent to the current value of the index multiplied by $1000. For the mini contract, one unit is equivalent to $200 X Index’s value. The price quotation is in US Dollar Index points, calculated to three decimal places. The contract is physically settled, and trading terminates at 10:16 Eastern time two days prior to settlement.

How do you start trading U.S. Dollar Index futures?

You need a futures broker that would grant you access to ICE Futures US where the U.S. Dollar Index futures contracts are traded and also help to clear your trades. So, to start trading this contract, you have to register with a futures broker and fund your account. Since futures contracts are leveraged instruments, you need not have the full dollar worth of the contract before you can trade it — you deposit the initial margin or a little more than that.

If you just want to speculate on price fluctuations, you may trade the CFD product of the index. Some CFD brokers, like IG, offer U.S. Dollar Index futures CFDs. With a CFD contract, you are in an agreement with the broker to exchange the price difference between the opening and closing of a trade. So, you don’t have issues like contract expiry and asset delivery.

What is the U.S. Dollar Index trading at?

As of December 19, 2022, the U.S. Dollar Index futures is trading at $104.280. You can view the live chart here or here.

What’s the U.S. Dollar Index futures hour?

The trading schedule is as follows: Sundays to Fridays, from 8:00 PM – 5:00 PM ET the next day. But the Open on Sunday night is 6:00 PM ET, with Pre-Open at 5:30 PM ET. From Monday to Thursday, the Pre-Open is at 7:30 PM ET.

Where can I find trading charts?

There are trading charts on any trading platform that provides chart services. If your platform does not provide charts, you can use TradingView, which provides free access to the charts of various instruments. However, to connect TradingView to your broker, you must subscribe to its Pro services. The ICE platform also has a line chart. You can also use Yahoo Finance, which offers free chart services, or you can subscribe to trading charts through a paid third-party platform like MultiCharts.

What are the trading symbols for U.S. Dollar Index futures?

The trading symbol for the full contract is DX, while that of the mini contract is SDX.

What is the specification for the U.S. Dollar Index futures contract?

One contract unit of the full contract of the U.S. Dollar Index futures (DX) is equivalent to the product of the index’s value and $1000 (Index’s value X $1,000), while that of the mini contract is Index’s value X $200. The price quotation is in US Dollar Index points, calculated to three decimal places.

The contract comes in the March/June/September/December quarterly expiration cycle. The daily settlement uses the volume-weighted average of all electronic trades transacted in the closing session (14:59 to 15:00 Eastern time). On expiry, the contract is physically settled, and trading terminates at 10:16 Eastern time two days prior to the final settlement.

Why should you start trading U.S. Dollar Index futures?

There are many reasons to trade U.S. Dollar Index futures. These are some of them:

  • You can trade it to hedge risk exposure in the exchange rate market
  • You can trade to diversify your portfolio into the Forex market
  • You can use the contract to speculate on the direction of the USD against the other major currencies

What is the contract size?

One contract unit of the U.S. Dollar Index futures is equivalent to $1,000 x the index’s value. So, the dollar worth of a contract depends on the current quote of the index. For example, given that the current quote is 104.28, as of writing, the USD worth of one contract unit of the U.S. Dollar Index futures (DX) would be $1,000 x 104.28 = $104,280.

What is the tick size?

The tick size of one contract of the U.S. Dollar Index futures is $5.00

What is the minimum price fluctuation for U.S. Dollar Index futures?

The minimum price fluctuation for U.S. Dollar Index futures is 0.005 index points

Are there any ETFs?

Yes, there are. These are some of them:

  • Invesco DB US Dollar Index Bullish Fund (UUP)
  • WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU)
  • Invesco DB US Dollar Index Bearish Fund (UDN)

What factors affect U.S. Dollar Index prices?

The factors that affect USDX include:

  • Political events: Major political events, such as elections or referendums in the US, Europe (especially Germany and France), Japan, and the UK, can have significant effects on the U.S. Dollar Index futures.
  • Natural disasters and global crises: With the USD normally considered a safe-haven asset, natural disasters and other crises, such as global economic crises and wars, often cause the U.S. Dollar Index futures to rise.
  • Economic reports from the countries whose currencies are part of the index, especially the US and EU: the reports with the most impact include:
  • Interest rates and policy statements from the Federal Open Market Committee (FOMC) of the Federal Reserve and the European Central Bank
  • Inflation-focused reports, such as the consumer price index and the producers’ price index
  • Growth reports, such as the GDP, manufacturing PMI, services PMI, and retail sales
  • Reports about the balance of payments, such as current account and trade balance reports
  • Consumer sentiment reports

What is the all-time high for U.S. Dollar Index futures?

Based on the TradingView chart for U.S. Dollar Index futures, the all-time high of this contract is 129.050, which it reached in November 1985.

What are the biggest risks in trading U.S. Dollar Index futures?

The biggest risk when trading any type of futures, including the U.S. Dollar Index futures, comes from adverse price movement. Since futures are leveraged instruments, the losses are calculated using the actual value of the contract size traded, not the margin deposited. So, if you trade with a 20x leverage, a 1% adverse movement would lead to a 20% loss, and a 5% negative movement would result in a 100% loss in your account — that is, your account would be wiped out.

What is the settlement method?

Physical delivery

What is the settlement procedure?

The U.S. Dollar Index futures are physically settled on the third Wednesday of the expiration month against six component currencies — euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc — in their respective percentage weights in the Index. Settlement rates may be quoted to three decimal places.

What is the block minimum for U.S. Dollar Index futures?

There is no position limit for this contract.

What is the difference between U.S. Dollar Index futures and the CFD for U.S. Dollar Index?

The futures contracts trade on regulated exchanges as standard contracts, while the CFD instruments are simple contracts between the online CFD broker and the trader to exchange the difference in price between the time the trade is opened and the time it is closed. Another difference is that futures contracts have expiry dates and may involve asset settlement, while CFDs can be traded indefinitely.

Which forex pair is the same as U.S. Dollar Index futures

U.S. Dollar Index CFD

What are some important dates for this market?

These are some of the important dates in the U.S. Dollar Index futures market:

  • November 20, 1985: The U.S. dollar index futures began trading the on the Financial Instruments Exchange, a division of the New York Cotton Exchange, which later became the New York Board of Trade (NYBOT) but is now a part of ICE Futures US.
  • September 3, 1986: Options on the U.S. Dollar Index futures began trading.

What is the highest U.S. Dollar Index has ever been its all-time high?

Based on the TradingView chart for U.S. Dollar Index futures, the highest level this index has ever traded was 129.050, which it reached in November 1985.

What is the lowest U.S. Dollar Index has ever been its all-time low?

Based on the TradingView chart for U.S. Dollar Index futures, the lowest level this index has ever fallen to was 71.050, which it reached in April 2008.

Conclusion

Trading this index futures contract is a good way to diversify your trading portfolio, hedge against exchange rate risks, and make money from speculating on the direction of exchange rates. However, if you want to trade U.S. Dollar Index futures profitably, it is important to use the right U.S. Dollar Index futures strategy.

FAQ:

How do I start trading U.S. Dollar Index futures?

To start trading, you need to register with a futures broker that provides access to ICE Futures US. After registration, fund your account with the initial margin or a bit more. Leverage allows you to trade without the full contract value.

Why should I start trading U.S. Dollar Index futures?

Reasons to trade U.S. Dollar Index futures include hedging risk exposure, portfolio diversification into the Forex market, and speculation on USD direction against major currencies.

What is the seasonality of U.S. Dollar Index futures?

Seasonality patterns indicate that the U.S. Dollar Index performs better in the first quarter of the year than in other periods, as observed in historical price movements.

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