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The index calculates the number of currencies that are declining compared to a given currency.
For example, if we apply the composite index to the US Dollar and we have for a particular date the following one-day rate of returns (Assuming we have only four forex pairs involving the US Dollar in our database):
EURUSD: -0.12%, AUDUSD: 0.2%, GBPUSD: 0.3% and USDCAD: 0.1%
In the EURUSD currency pair (Euro / U.S. Dollar), the USD is the counter currency and the rate of return of the pair is negative, therefore the index increases by one.
In the AUDUSD (Australian Dollar / United States Dollar) and GBPUSD (Pound Sterling / United States Dollar) currency pairs, the USD is also the counter currency and both rate of return are positive, therefore the index is not changed.
In the USDCAD currency pair (United States Dollar / Canadian Dollar), the USD is the base pair and the rate of return is positive, consequently the index increases by one.
The composite index at that particular date would be equal to 2.
This item uses the USD; however, you can create the same composite for a different currency by changing the composite formula. To create the EUR Advance Index, you should change each occurrence of 'isbase("USD")' to 'isbase("EUR")'.
The USD advance index should not be used directly; it must be smoothed with a simple or exponential moving average.
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