Does your broker offer index for clients to trade? And you are wondering what this so called index is. This is the question I got ask recently via my email except the question also include “how to use index in trading forex effectively” which I will talk more later as this website progress further. But I think it’s appropriate I first of all define (discuss) about indices to give my readers a bit of understanding about this financial instrument.
Before I proceed further, let me make this very clear so I won’t get you confused with my spellings. Index is the singular form while indexes or indices can be used as the plural form so when you see me interchange indexes for indices don’t feel confused because they both mean the same thing.
What are indices?
Indexes have various definition based on different brokerage firm but I will try to give you a clear definition of what that word means.
Index is measurement of the price performance of a group of shares from a particular exchange.
Index can be defined as a portfolio of stocks that represents a particular market or market sector
You must have noticed I used the word shares and Stocks this is because indexes are widely associated with stocks and those who trade stocks are more familiar with this financial instrument than forex traders.
Most developing countries have at least one index. Below are examples of some countries and the name of their indices.
- Belgium has the BEL20 Index.
- Brazil has the IBrx Index (consist of approximately 100 companies).
- Canada has TSx60 Index.
- China has the SSE Index and CSI300 Index.
- Cyprus has the CySE GENERAL Index.
- France has the CAC40 Index and CAC Small Index.
- Germany has DAX Index.
- India has the Sensex Index.
- Israel has the TA-123 Index.
- Japan has the Nikkei225 Index.
- Malaysia has the MESDAQ Index.
- Nigeria has the NSXA-B Index.
- Russia the RTS Index and MICEX Index.
- Singapore FYSE group Index.
- South Korea has the Kospi Index.
- United Kingdom has the FTSE 100
- United State has the CBOE, DOW JONES &COMPANY, GOLDMAN SACH, Nasdaq, Russell indexes, S&P500.
NOTE: The Stock market indices cover specific industries such as: energy, electronic, environment and clean energy, finance, raw materials. Metals, technology sector, real estate, space, water etc.
Enough of stocks its making me feel sleepy, let’s talk about currencies.
If the United State stock and other countries can have index then why can’t currencies especially the USD.
The United State Dollar Index normally denoted as USDX. Though other broker may have different name which they use in there platform so contact your broker to know the appropriate name used example the name which lite-forex broker use for the USD index is USDLFX.
The USDX is similar to how stock indexes operate.
What is the currency index?
We will be using the USD index (USDX) as our reference point. The US Dollar index consists of 6 foreign currencies which include:
- Switzerland Franc(CHF)
- Canadian Dollar (CAD)
Do not forget that the EURO is not used by just one country but by 19 countries under the European Union (EU) so 19 European countries plus 5 countries list above (exclude the euro because it’s a currency use my these EU states) so we have a total of 24 countries and their currencies that is used to measure the USD strength.
Because not all country have the same economic or currency strength a system called “Geometric Weighted Average” is used when calculating the United State Dollar Index and from the chart below we can see that:
The euro with its 19 allied state makes up 57.60% of the US index- which is so far the largest.
CHF only amount to 3.60%
SEK owns 4.20%
CAD makes up 9.10%
GBP makes 11.90%
JPY contribute 13.60%
So in regard to their share in the US index we have the European Union, after that, Japanese Yen, then Great Britain Pounds follow by Canadian Dollar, Sweden Krona and lastly Switzerland Franc.
Someone might be asking what I will do with all these information. Well, though they are almost pretty useless but it is necessary to at least know a thing or two about the components that makes the US index and how it works.
The USDX shows the global strength of the United States dollar globally and in substituent articles I will show you guys how you can effectively predict the movement of currencies by using their indexes.