The trade opportunity passed quickly as the US dollar began to fall very early this morning, but the strategy that provided the trade signal is still useful.
Based on Fed comments US dollar index futures (DX) took a big hit on Wednesday. The fall was so sharp it erased all gains seen on the most recent rally. That's stage one of our strategy. We need a reversal move that erases the entire prior wave of a trend (if the reversal is a bit bigger, that is even better).
The US dollar then bounced. This is the second phase of the strategy--we want a recovery or pullback from the sharp move. That recovery must say below where the sharp reversal originally began (creating a lower high).
Next, the US dollar consolidated. The 4-hour chart shows five bars (20 hours) where the price moved mostly sideways. The 4-hour or hourly chart will provide more signals like this, though the strategy can be traded on a daily chart as well (and all other time frames).
While the price is consolidating, note that if the price drops below the consolidation, then price will have just created a lower high following a big reversal move--in this event you want to be short.
Figure 1. US Dollar Index Futures - 4 Hour Chart
For the US dollar the short trade signal came at 99.14, when we had at least a four bar consolidation and then the price broke below the low of that consolidation. The stop loss is placed above the high of the consolidation at the time the trade occurs.
This strategy doesn't have a specific target because the moves are often volatile surrounding it. Initially take some profits at the nearest support area. In this case it provides a 2:1 reward to risk. If the downtrend continues, lower targets will provide a higher reward for the risk taken. A trailing stop is advised.
The same concepts apply with a sharp reversal to the upside.