DXY Dollar Reversal

## DXY Dollar Reversal — Full Methodology

### Overbought/Oversold Detection

1. **RSI(14) extremes:** Overbought > 70, Oversold < 30 on DXY daily chart

2. **Bollinger Band touch:** DXY at or beyond the upper/lower Bollinger Band (20, 2σ)

3. **Both conditions required simultaneously** — single indicators produce too many false signals on DXY

### Rate Expectation Filter

1. **Overbought DXY + dovish Fed:** Fed funds futures imply rate cuts → short DXY (dollar should weaken)

2. **Oversold DXY + hawkish Fed:** Fed funds futures imply rate hikes → long DXY (dollar should strengthen)

3. If rate expectations contradict the technical signal → no trade

### Entry Criteria

1. RSI extreme + Bollinger Band touch

2. Rate expectation alignment

3. Reversal candle pattern (engulfing, hammer, or doji star)

4. Enter at the next day's open

### Exit Rules

- **Profit target:** 20-day SMA (mean reversion)

- **Stop loss:** 1.5% beyond the extreme

- **Time stop:** Exit after 15 trading days

- **FOMC override:** Exit before any scheduled FOMC meeting during the hold period

### Position Sizing

- Trade via UUP (long dollar ETF) or forex pairs (EUR/USD inverse proxy)

- Risk 1% of portfolio per trade

- DXY is relatively low-volatility — can allocate 10–15% of portfolio

### Best Market Conditions

Works best at inflection points in the rate cycle — when the dollar has overshot in either direction relative to rate expectations. The 2022 dollar peak and subsequent reversal was a textbook signal. Less effective during trending rate environments.

### Backtest Notes

Tested on DXY daily bars + Fed funds futures from Jan 2015 to Dec 2024. The rate expectation filter reduced false signals by ~40% compared to technical-only approach.