How to Build Your Own Currency Index Using TradingView
We just have a quick question here from Tom who asks how we can use something like TradingView to build your own currency index for the dollar, for example. We did one a while back in a video where we built a currency index based on a couple of emerging market currencies and used that to compare it to the US dollar Turkish lira.
And Tom just wants to know how we go about this. So thanks for the question, Tom. And the good news is it’s actually quite simple to do. But before I show you how to do it, let’s start with the reasons for why you would want to do something like this in the first place.
Why Create a Custom Currency Index?
As you guys know, the dollar index, the DXY, is what we use as our broad-based dollar index. In a prior video called “Finding the Perfect Dollar Index,” which you can find in the video library, we showed that the difference between the dollar index and some of the other indexes out there are very negligible in the bigger picture. So we like to just stick to the dollar index to track the dollar.
Now, the reason why there is more than one dollar index, of course, is because the index does have some flaws. The biggest one is that it’s very heavily weighted towards the euro. The euro makes up almost sixty percent of the dollar index at fifty-seven spot six percent. So, for many traders, the dollar index, the DXY, is essentially just an inverse of the euro due to that weighting, which makes it less accurate as a true dollar measure, but still more than what we need for our analysis purposes.
There are times when it might be worthwhile creating your own index, not only for the dollar, but this could be helpful for other currencies as well. The specific example that Tom spoke about was an index that we built using the major emerging market currencies versus the US dollar. We wanted to compare a specific currency, in this case, the Turkish lira, versus the US dollar, and compare that versus a basket of other emerging market currencies.
Creating a Custom Index on TradingView
To create the index is actually very simple. Here’s how:
- Open TradingView and Search for Symbols:
- Navigate to TradingView and open the search symbol bar.
- Select the currencies you want to include in your index. Make sure you are selecting the correct base and quote currency layout.
- Adjust Currency Pairs for Consistency:
- Ensure consistency in the base and quote currencies. For example, if you’re creating a dollar index, convert pairs to have the dollar consistently as the base or quote currency.
- For instance, if you use EUR/USD, GBP/USD, and AUD/USD, but also want to include USD/CAD, you need to convert USD/CAD to CAD/USD to maintain consistency in your formula.
- Build the Index Formula:
- Combine your selected currency pairs using asterisks (*) to denote multiplication.
- Example: For a major currency index, your formula might look like this: EURUSD*GBPUSD*AUDUSD*…. Ensure you’ve adjusted pairs like USD/CAD to CAD/USD where necessary.
- Input the Formula in TradingView:
- You can either type the formula directly into the TradingView search bar or prepare it in a document and paste it into TradingView.
- Copy and paste your prepared formula, then press enter to view your custom index.
- Adjust the Scale for Better Comparison:
- Invert the scale if necessary to match the viewing perspective of standard indices like the DXY. This can make your custom index visually comparable to existing indices.
Example: Building an Emerging Market Currency Index
To illustrate, here’s an example of how to build a custom index for comparing the US dollar against emerging market currencies:
- Select Currencies:
- Choose pairs like USD/CNY, USD/MXN, USD/ZAR, USD/RUB, etc.
- Convert Pairs if Necessary:
- Ensure consistency in your base and quote currencies.
- Build and Input the Formula:
- Formula: USDCNY*USDMXN*USDZAR*USDRUB*…
- Copy and paste this formula into TradingView.
- Adjust and Compare:
- Adjust the scale as needed for a clear comparison.
- Add other relevant indices for comparison, such as the dollar index (DXY), to see how your custom index performs against established benchmarks.
Visual Comparison and Practical Application
Remember that during 2020, emerging market currencies like the Chinese yuan, Mexican peso, and South African rand were on an absolute tear versus the dollar. However, due to President Erdogan’s influence on monetary policy in Turkey, the Turkish lira kept losing momentum and ground versus the dollar despite the flood of inflows into emerging market currencies. By creating a custom index, you can visually compare the performance of a basket of emerging market currencies against the dollar versus the Turkish lira to identify potential for catch-up.
Leveraging Economic Calendar Insights
To enhance your trading strategies further, consider utilizing our professional economic calendar. It offers comprehensive alerts and detailed analyses that are essential for tracking major economic events and their impacts on various currency pairs. By integrating these insights with your custom indices, you can make more informed and strategic trading decisions.
Conclusion
Creating a custom currency index on TradingView is straightforward and allows for more tailored analysis. By following these steps, you can build an index that better reflects the performance of the US dollar against a specific set of currencies, such as emerging markets. This approach is particularly useful for identifying trends and potential opportunities that may not be apparent when using standard indices.
So that’s it, Tom. Any other questions, please don’t hesitate to let me know!