How to Build Your Own Currency Index Using TradingView
Table of Contents
Introduction to Currency Indices
A currency index measures the strength of a currency against a basket of other currencies. While the US Dollar Index (DXY) is the most well-known, you can create custom indices for any currency to better analyze its overall strength or weakness.
Building your own currency indices allows you to see the true strength of a currency independent of individual pair dynamics. This provides clearer signals than looking at individual pairs in isolation.
TradingView makes it easy to create custom currency indices using simple mathematical formulas. These custom indices can help you identify which currencies are strongest and weakest, improving your trade selection.
Why Build Your Own Index
There are several compelling reasons to create custom currency indices rather than relying solely on standard indices like the DXY.
Limitations of Standard Indices
- Euro-heavy weighting: DXY is 57% weighted to EUR, skewing the picture
- Outdated composition: DXY was created in 1973 and does not include emerging currencies
- No commodity currencies: AUD, NZD, CAD are not in the DXY despite their importance
- No Asian currencies: CNY and other Asian currencies are excluded
Benefits of Custom Indices
- Balanced weighting: Create equal-weighted baskets for clearer signals
- Any currency: Build indices for EUR, GBP, JPY, AUD, or any currency you trade
- Specific focus: Create EM currency baskets or commodity currency indices
- Real-time updates: TradingView calculates your index in real-time
Custom indices are particularly valuable for identifying divergences. If your EUR index is falling but EUR/USD is flat, it might signal EUR weakness being masked by USD weakness.
Step-by-Step Guide
Creating a custom currency index in TradingView is straightforward using the symbol input box.
Basic Formula Structure
To create a currency index, you multiply pairs where your currency is the base and divide by pairs where it is the quote:
- Identify your target currency: Decide which currency you want to create an index for
- Choose basket currencies: Select 4-8 major currencies to compare against
- Construct the formula: Multiply pairs with target as base, divide when target is quote
- Apply nth root: Use nth root where n = number of pairs for normalization
For a USD index against EUR, GBP, JPY, and CHF, you would use: (USDCHF*USDJPY)/(EURUSD*GBPUSD). Take the 4th root to normalize.
TradingView Syntax
In TradingView's symbol input box, enter your formula like this:
- Basic formula: (EURUSD*EURGBP*EURJPY*EURCHF)^0.25
- With broker prefix: (FX:EURUSD*FX:EURGBP*FX:EURJPY*FX:EURCHF)^0.25
- Inverse pairs: Use 1/PAIR for pairs quoted in reverse
Practical Examples
Here are some useful custom currency indices you can create.
Equal-Weight USD Index
An alternative to DXY with equal weighting across major currencies:
- Formula: (USDCHF*USDJPY*USDCAD/(EURUSD*GBPUSD*AUDUSD*NZDUSD))^(1/7)
- Advantage: No single currency dominates the index
- Use case: Cleaner USD strength/weakness signals
EUR Strength Index
Measure Euro strength against major currencies:
- Formula: (EURUSD*EURGBP*EURJPY*EURCHF*EURAUD)^0.2
- Advantage: Shows EUR strength independent of any single pair
- Use case: Confirm EUR trends before trading EUR pairs
Commodity Currency Index
Track the aggregate performance of commodity currencies:
- Formula: (AUDUSD*NZDUSD*USDCAD^-1)^(1/3)
- Advantage: Tracks risk sentiment through commodity currencies
- Use case: Gauge risk appetite and commodity cycle positioning
Custom indices are tools for analysis, not tradeable instruments. Always verify signals on actual currency pairs before entering trades.
Experiment with different currency baskets and weightings to find what works best for your trading style. Save your favorite indices as templates in TradingView for quick access.
