The dollar started the year with a bang…
The U.S. Dollar Index (DXY) tracks the exchange-value of the dollar against a basket of major trading partner currencies.
And since the start of the year, it’s up 2%. For context, the DXY ended 2023 being down 2%.
So getting another 2% move in less than one month is a big deal…
But as I’ll show you today, that move higher is about to run out of steam.
That means an opportunity to take advantage of a coming reversal in the dollar.
Here’s Why Currency Trading Can Be Powerful…
Because brokers extend significant leverage when you trade currencies, capturing even a 2% move can make a big difference to the value of your account.
Currency brokers offer up to 40x to 50x leverage. So even if you only use a fifth of what a broker is offering you, you can still use 10x leverage.
10x leverage on a 2% move now becomes a 20% move instead.
This is exactly why currency trading can be so powerful.
Of course, it’s essential to have an ironclad risk management strategy in place. Risk management is what makes the leverage work for you instead of hurting you.
Now let’s check out a chart of the DXY.
It’s all in the chart below…
Pay attention to the pink shaded area. It shows resistance for the dollar.
Resistance is a technical term. But at its most basic, it’s a level that price has reached previously… but not managed to pass.
Hence, “resistance.” Price would have to push past this level to be able to go further. Keep this in mind for a moment.
As you can see, on November 28, DXY put in a swing low at 102.65 and began trading higher.
Then on December 6, DXY reached a high of 104.23.
And over the next three days, the market tried to break even higher but couldn’t make any significant headway. The rally stalled. And DXY kept dropping until it hit support on December 28 at 100.71.
Now, DXY is trading back at the 104 level it reached last December.
But a key technical indicator tells me it will again fail to break through this level of resistance… and head lower.
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On the bottom of the chart above, I’ve included the RSI.
If you’re an experienced trader, you’ll know what that is. But for folks who are newer to trading, the RSI is a momentum indicator.
And it’s flashing an overbought signal (green shaded area).
That means that upward momentum in the dollar is reaching extreme levels. Think of it like the RPM gauge in your car.
When you drive your car really hard, you’ll hit a point where the engine simply can’t rev any higher.
You have to take your foot off the gas so the engine can cool off. That’s exactly what’s going on with the RSI and the DXY right now.
An overbought RSI and strong resistance at 104 is a dangerous combination for the dollar.
I’m betting the dollar will stall at this level once again… and then start falling.
For currency traders, there’s a couple of ways to play this information. The first is an aggressive approach where you’d look to buy the dollar into that 104 resistance zone.
This would mean taking a short-term position with a fairly tight stop. A more conservative approach would be to wait for the DXY to reach 104… and then start looking for signs of a confirmed reversal.
P.S. If you’re not a currency trader yet… but would like to get in on this powerful niche of the market… you can check out my premium letter Currency Trader, right here.