When trading Forex, we never really "directly" trade the U.S. dollar even though we have six U.S. dollar pairs that allow us to do so indirectly. These pairs are known as the "majors". The majors account for approximately 90% of daily trading.

The strength or weakness of the U.S. dollar can be charted with the U.S. Dollar Index (symbol $DXC). Let's take a look at the U.S. dollar (USD) on a chart.

Starting with this view of an intraday 180-minute chart, we see that the USD is currently trading just below the current downtrend line. Note that prices also bounced off the .500 Fibonacci level.

So, now, let's look at the corresponding EUR / USD chart at that same point on the chart. The market is almost the inverse of what we saw on the $DXC. It isn't a stretch to say that, if the $DXC breaks above the downtrend line, the EUR / USD chart will break down below the uptrend line.

What we're talking about here is the next level of confirmation. I especially find this relationship powerful when looking at the EUR / USD. Will all markets have such an exact correlation? No! However, it is powerful to see where the U.S. dollar is trading in relation to the other currency in the pair. It is just as important to see and measure the trendlines, support and resistance of the USD so that you can see whether it is strong or weak versus the other currencies.

Here is a simple table showing when the U.S. dollar is strong versus weak:

You'll see that, when the U.S. dollar is the base currency, the U.S. dollar is strong when the underlying chart is in an uptrend (i.e., USD / CHF).

Now that we have a general understanding of the relationship between these currencies and the U.S. dollar, it is only natural that the next step is to analyze the levels. Now, please don't assume that we are merely matching uptrends with downtrends or support with resistance. It's not that simple. There can be a correlation between a downtrend in one market (which is really resistance) and support in another market.

With that in mind, take a look at the following intraday chart of the British pound. This is the same interval and time frame as the U.S. dollar chart we looked at previously.

There are two near-term support levels (green arrows) and two near-term resistance levels (red). After we've looked at the U.S. dollar chart and the British pound chart, we find that the most immediate correlation is between the downtrend line of the USD and the .886 Fibonacci level of the GBP.

For both the EUR and GBP, we can see that the $DXC chart could be confirmation, considering that, when the EUR and GBP are in uptrends, the U.S. dollar is weaker. In both of these charts, the U.S. dollar is the second currency.

Let's examine another market where the U.S. dollar is the base currency.

When looking at the chart of the Swiss Franc (symbol: CHF A0-FX) we see that there is no near-term support or resistance level to correlate with the $DXC chart. The Swiss Franc is in "neutral" territory (no pun intended!); it is trading between the .786 Fibonacci level (support) and the .618 (resistance).

Prices were also consolidating between an uptrend and downtrend, slowly forming a triangle. From this view, we see that there is no confirmation here — there is no trade — regardless of what the U.S. dollar is doing. And, sometimes, knowing when not to trade can make all the difference.

Let's take a look at another market where the U.S. dollar is the base currency.

The circled area shows where USD / JPY has one major and two minor downtrend lines to contend with. This chart does have correlation with the $DXC chart. Although the market has pierced all three downtrends, we have yet to close above it. Because we know that, if the USD / JPY chart is in an uptrend, the dollar is strong, this could potentially be excellent confirmation.

All entries and exits are about timing. Price action, price patterns and confirmation are the keys to answering the questions of when and why to enter and exit the market.

*Reprinted (and modified) with permission from Raghee Horner of EZ2TradeSoftware.com