Dollar Index Up 18% In 2022. Where Is The Top?

2022 has been a challenging year for stock investors/traders. 

The solution? Diversifying across other asset classes. When money leaves stocks, it often flows into forex and commodities, which is what we have seen this year. 

The Dollar Index has moved up 18% this year, trading at levels last seen in 2000 in a bull market. This includes an 8% increase since my last post in August. 

The question is how much further upside potential does the Dollar Index have?

This, of course, is an impossible question to answer with any degree of certainty. However, we can look at historical levels to see potential reversal points in the market. 

I have the monthly timeframe below.

The first critical resistance level is the July 2001 high at the 120-round number. 

If this is broken, the next level is the current all-time high dating back to 1985. 

I am a big believer in the proven investing mantra of the trend is your friend until the bend at the end. Going in the established direction of the market removes all the guesswork of trying to figure out when a market will top or bottom out.

Trying to pick tops and bottoms is a doomed approach that budding investors and traders regularly fall prey to. In my previous update on the stock market, I touched upon the falling knife scenario and buying into 'under-valued' stocks. 

Instead, I take a position and hold for as long an asset is trending and follow with a well-placed trailing stop loss (TSL). When the TSL is tagged, I exit my position. Simple and effective. 

I typically hold trending stocks for 12 to 24 months before my TSL is tagged. For forex, 9 to 12 months is not uncommon. 

Like the S&P 500, I use the Dollar Index as my indicator of market conditions. Once in a trend, I narrow down to the currency pairs that offer the best risk to reward over the coming months. 

Forex pairs in my portfolio are as follows:

Long positions:

  • USDJPY
  • SGDJPY

Short positions:

  • AUDUSD
  • EURUSD
  • GBPUSD

My risk allocation is typically 1% or less. I then compound as the trend develops. Over a period of 9 to 12 months, the reward will be several multiples of the risk which accumulates nicely over several pairs. This is how I keep my losses to a minimum but exponentially grow my profit as the trends develop. 

I have several other pairs I am monitoring that I will add to my portfolio once they meet my high-probability checklist. 

 

Featured image sourced from Shutterstock

Posted In: ForexOpinionMarketscontributorsDollar IndexForex trading
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