This year has been a really challenging one for currency traders.

At the very least, it’s been challenging for trend-following traders like me.

That’s because until July 10, the dollar had basically gone nowhere the entire year. And the dollar is the king of the currency markets.

Sure, it’s possible to trade other currencies, but what’s going on with the dollar has an impact on the entire market. And when the dollar is trading sideways, it means that volatility tends to be subdued.

But on July 10, the dollar broke out of an important chart pattern and started to sell off hard.

On Monday, readers were walked through the importance of the dollar and the power the Fed has over every other central bank in the world.

Today, we’re going to look at an updated chart of the dollar index (DXY) to see if there are any technical clues as to the future of the greenback.

You can see that chart below.

First, let’s look at the Bollinger bands.

Bollinger bands are a great measure of market volatility. When prices break through the upper or lower bands, it’s a sign that the market is moving strongly either higher or lower.

While a market can trade for a significant amount of time, it’s worth noting that the majority of the time, a market will trade between the upper and lower bands.

This means that breaks beyond the upper or lower bands are important events that traders should be looking for. In fact, one of the first trading strategies I used early on in my career relied entirely on reversal trades found along those outer Bollinger bands.

We can see that DXY has strongly pierced the lower Bollinger band before trading back inside of it. However, simply tagging one of the outer bands isn’t a good enough reason on its own to get into a trade.

That’s why we also have the Relative Strength Index (RSI) at the bottom of the chart.

The RSI is my favorite momentum indicator. It does a great job of helping identify turning points in the market when combined with another indicator like the Bollinger Bands.

We can see how the RSI registered an extreme oversold reading at the same time prices broke below the lower Bollinger band.

These two signals both suggest that the dollar is likely to continue trading higher for at least a little bit longer. However, my analysis suggests that this upside will end up being a bear market rally.

That means that after the dollar gets a bit of relief, it’s likely to sell off once more against its peers.

Aggressive traders could look to play both the long and short side. Trend-following traders, on the other hand, will wait out the rally and look for an opportunity to ride the dollar lower.

As a currency trader, I’ll be watching the moves the dollar is making very closely. Once I see something interesting, you’ll receive an update right here in Market Minute.

Happy trading,

Imre Gams

What’s been your experience trading currencies in 2023?

Let us know your thoughts – and any questions you have – at feedback@jeffclarktrader.com.