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When you decide to trade in the foreign exchange market, you deal with what is commonly referred to as currency pairs or sets because you cannot possibly buy a currency without selling another for it.
For example, let’s assume you decide to buy U.S dollars (USD), you can sell your Australian Dollars (AUD) in trade for those dollars. That is you are trading the currency pair AUD/USD – selling the AUD to buy the USD. To know which pair is best, you need a currency strength meter as one of the tools.
Currency pair exchanges happen a lot and most forex traders have to spend time gaining an insight into how a currency will move and as such usually encounter problems predicting the trend.
They use technical indicators like currency oscillators, Fibonacci sequences, and chart patterns, in an attempt to predict currency pair movement and pick the Best Tradable Currency Pairs in the World.
Knowing how to use the currency strength meter in trading makes you able to show conclusive success in predicting the trends of currency pair movement. This article discusses extensively what the currency strength meter is and how you can use it to make accurate trading strategy decisions.
📌 During technical analysis, the currency strength meter is one of the indicators used by traders.
📌 With a currency strength meter, traders can easily find out what currencies are doing well and worth paying attention to.
📌 The strength of currencies is to an extent, affected by timeframes.
SEE ALSO: How To Use AI In Forex Trading
SEE ALSO: How To Trade Synthetic Indices
What is a Currency Strength Meter?
A Currency Strength Meter is an algorithm-based technical indicator that demonstrates which currencies are strong at the moment as well as those that are weak. It can also be regarded as a visual guide that uses the exchange rates of different currency pairs to produce an aggregate, comparable strength of each currency.
For instance, to calculate the strength of the USD, the currency strength meter would calculate the strength of all pairs containing the USD (e.g. USDJPY, EURUSD, GBPUSD, AUDUSD, etc.) and then put those calculations together to determine the overall result for the US dollar.
Ready to compare currency strength? Choose one from the 6 Best Currency Strength Meters for technical analysis.
With the aid of this indicator, forex traders can easily find out which currency is performing strongly at that moment or period and which one is performing otherwise. With this information, the traders will then be able to create trading strategies by applying them to the charts on their trading platforms.
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How to Trade Using a Currency Strength Meter
The first thing you should take note of in using a currency strength meter to trade is that timeframe matters a lot. A single currency can be strong and weak in different timeframes (starting from one minute to one month). So it’s important to consider the timeframe you are trading at when you choose the currency.
For instance, the strength of the United States dollar (USD) may be very high in today’s timeframe, but in the case of the monthly analysis, it might be among the weakest currencies on the list. Yes, the currency strength meter is very helpful with these small daily steps for opening short positions, but it’s preferable to increase your trading opportunities and go for long trades.
Trading decisions made on the higher timeframes like W (one week) or MN (one month) can be more accurate and defining.
Always put it somewhere in your mind that some unusual news can pop up anytime that can lead to some sort of instability and cause traders to make panic moves which would then result in a major but temporary disruption.
This can seriously damage the strength of a currency in a shorter frame, but longer frames help balance such issues more easily. So if you are going to trade with the currency strength meter, you should widen your perspective.
Numerous factors can damage a currency’s strength in a lower timeframe whereas higher timeframes will bring balance to your decision-making process.
However, to avoid any form of confusion, you should stick to a specific timeframe that aligns with your trading style and meets your requirements. Short-term day traders conduct their operations using 30-minutes and 1-hour timeframes whereas long-term traders consider the daily timeframe more useful.
Nevertheless, there aren’t more or less profitable timeframes for trading, and most times, it always depends on your trading strategy and sometimes your workload. This is why technical analysis is critical to forex trading in choosing a good strategy. But make sure never to start trading two currencies that are strong or weak at the same time.
Finally, to trade effectively using the currency strength meter, avoid going long on two pairs of currency moving in opposite directions. It is much easier for you to minimize risks while investing in two pairs of currencies with a positive correlation.
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Coupled with that, you can also decrease your losses while hedging two pairs of currencies with a negative correlation that is close to perfect. By using this strategy, you might not be able to avoid losses at all but you will be able to minimize them.
Frequently Asked Questions (FAQs)
Q1. How do you measure currency strength in forex?
To measure a currency’s strength,
- First, you identify the base currency.
- Compare and match the base currency with available Forex pairs.
- For each paired currency, calculate the relative strength.
- Take an average score of the calculations
Now you can use the results trading.
Q2. Does MT4 have a currency strength meter?
The MT4 does not have Currency Strength Indicators. However, there are custom currency strength meters you can use. Follow these simple steps on how to Install custom MT4 Indicators if you are looking to use one with MT4.
Q3. How do I know if a currency is strong or weak?
A strong currency is one that is becoming more valuable relative to another. A weak currency, on the other hand, is one that is becoming less valuable relative to another currency.
The information provided by the currency strength meter alone is not sufficient for a successful trading strategy. So as a trader, whether it is between Manual Trading Vs Automated Trading, it is advised that you make your trading strategies and apply the currency strength meter data to see how it affects the process.
If the data obtained support your trading plan, well and good. But if the currency strength information contradicts the strategy, you should avoid trading for the time being.
Also, the currency strength meter is not 100% accurate as it depends on the timeframe you choose, which is why the longer the timeframe you choose the higher the accuracy.
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Therefore always make sure you study the state of the market at the moment before you trade because the currency strength meter may not be useful if the market is just recovering from a recent huge spike no matter how accurate it may be.
Finally, take note that the currency strength meter has nothing to do with generating buy/sell signals. Therefore you should do your research well before you make any decision.