How to Use Dollar Index for Intermarket Analysis (ICT)

TL;DR

The dollar index reveals market bias through risk-on/risk-off relationships: when the dollar rises it is a risk-off, flight-to-quality move that pushes foreign currencies and stock indices lower. Traders can pair this with bearish order blocks and seasonal tendencies, like a May decline, to forecast where price draws next toward relative equal lows.

Transcript

all right folks welcome back this is our 21st episode of the 2022 free ict youtube mentorship little tongue twister there so we're looking at the hourly chart on the dollar index why are we here why are we looking at this well i'm looking at this because i want to show you the relationships between a risk on and risk off market if you've been follo... Read More

Key Insights

• The dollar index moves inversely to foreign currencies: dollar up means foreign currencies decline, and dollar down means they rally, because a rising dollar is a risk-off flight to quality.
• Risk-off scenarios imply most other markets and asset classes decline as money pours into the dollar as a safe haven and out of risk assets like foreign currency.
• The e-mini S&P showed an inverted relationship to the dollar, declining as the dollar created its important low, confirming intermarket analysis across universally applicable concepts.
• A bearish order block has defined levels: the low, the open, the mean threshold at the halfway point, and the high, with the high being the level least likely to be traded to.
• The trader forecast the dollar index dropping to around 99.92, then running relative equal highs higher toward objectives near 102 and 103.
• May is a seasonal decline tendency, which combined with a daily bearish order block warranted looking for downward pressure in the e-mini S&P toward relative equal lows.
• The trader admitted an error: he expected one more spike up toward the 4320 level before rolling over lower, but that rally did not happen.
• New York local time resolves all daylight savings confusion: toggling TradingView to New York time and tracking a New York clock removes uncertainty about session timing like the 3 a.m. London open.

Questions & Answers

Q: How does the dollar index affect foreign currencies?

The dollar index moves inversely to foreign currencies. When the dollar goes higher it puts pressure on foreign currencies, making sustained rallies less likely and sustained declines more likely, so dollar up means foreign currency down and dollar down means foreign currency up. This occurs because a rising dollar reflects a risk-off scenario, a flight to quality where money pours into the dollar as a safe haven and out of risk assets like foreign currency.

Q: What is a risk-off scenario in trading?

A risk-off scenario is when the dollar index is going up, implying that generally every other market or asset class starts to decline. It is treated as a flight to quality or a safe haven, so money pours into the dollar and out of risk assets such as foreign currencies. This is why the euro dollar was expected to go lower and make a new low on the daily chart, which it did. The concept also applies to stock and index markets.

Q: What are the levels of a bearish order block?

A bearish order block has several defined reference levels: the low of the order block, the open of the order block, the mean threshold which is the halfway point, and the high of the order block. The high is described as the level least likely to be traded to. In this case price rallied up into the order block but did not even reach its high, then showed the expected weakness heading into the seasonally bearish May month.

Q: Why did the trader forecast the dollar index dropping to 99.92?

The trader forecast the dollar index dropping to around 99.92 because he was bullish on the dollar and expected it to rally from that level. He said he would then run the relative equal highs and push price higher toward objectives around 102 and 103. He drew on almost 30 years of experience and intermarket relationships, publicly stating the level in advance so viewers could judge whether the forecast proved right or wrong.

Q: How does seasonality factor into the e-mini S&P analysis?

The trader noted that going into May there is usually a seasonal decline in the e-mini S&P. Because of this seasonal tendency, he was looking for signatures to warrant downward pressure in that asset class and reaching for the relatively equal lows on the daily chart. Combined with the daily bearish order block and the inverted relationship to a rising dollar, these factors together supported his bearish bias and expectation of price drawing lower toward liquidity below relative equal lows.

Q: What mistake did the trader admit making in this episode?

The trader openly admitted he did not get it right. He was expecting price to rally just a little higher and maybe flirt with the 4320 level, thinking there could be one more spike up before rolling over and going lower. That did not happen. On the 15 minute time frame he wanted to see a more pronounced rally of about 15 to 20 handles above the midnight opening price before a breakdown, but only got small anemic movements.

Q: How should traders handle time zones and daylight savings on charts?

The trader recommends resolving all daylight savings and time zone confusion by simply following his time instructions using New York local time. On TradingView, you click the time area at the bottom, a window pops up, scroll to New York, highlight and click it, and you are set. He also advises setting a clock on your computer that always tracks New York local time 24/7, so you never have confusion about session timing like the 3 a.m. London open.

Q: Does the ICT mentorship apply to cryptocurrency?

The trader states he does not trade cryptocurrency and has zero experience with it outside of a demo or paper trading account. He has never opened a crypto account and has no interest in that asset class, identifying himself as a forex and futures trader. However, he notes that many of his students trade crypto and swear by his concepts working there, and he emphasizes that everything he teaches is universal and applicable across all markets.

Summary & Key Takeaways

• This 21st episode of the 2022 free ICT YouTube mentorship examines the hourly dollar index chart to teach risk-on versus risk-off relationships. A rising dollar signals risk-off, a flight to quality that pressures foreign currencies and index markets lower, giving traders directional bias through intermarket analysis.

• The trader recalls publicly forecasting the dollar index dropping to around 99.92 before rallying toward 102 and 103 objectives. He connects this to a daily bearish order block on the e-mini S&P and a seasonal May decline, expecting price to reach relative equal lows as the next draw on liquidity.

• He transparently admits a missed call: he expected one more spike toward 4320 before a reversal lower, which did not occur. He also explains power three, the New York midnight opening price, the 3 a.m. London session, and resolving daylight savings by setting TradingView to New York time.