Observing a chart to ascertain what currency is weak and which is strong can be a daunting task. As it could become pretty confusing along the line. Hence, here is the Currency Strength Indicator Review to guide further.
When you consider the intraday clatter or the popular multi-timeframe analysis, observations could become even more puzzling. When you add to that situation, the aspect of comparing the same currency with a host of others will prove that ascertaining the strength of currencies is not a tea party. It could be discovered that the 15-minutes chart, for example, the EUR can be seen as the strongest against the USD. Nevertheless, if the same pair of currencies is analyzed on the one-hour and four-hour charts, a whole new discovery will be produced.
The latest inputs can show a different story with the EUR/USD being in a harsh bearish trend. Experientially, such contradicting analysis occurs regularly in the Forex market. Whenever the Forex charts don’t make plain the strength of a particular currency, this is where a good Currency Strength Indicator fills the gap.
In this Currency Strength Indicator Review, we shall take a look at what the currency strength indicator is. The application of the indicator to trades, how it compares against technical indicators. And understanding the indicator using currency strength meter along the rest.
What is the Currency Strength Indicator?
The Currency Strength Indicator as the name implies, is a Meta trader 4, MT4 custom-made Forex trading indicator which was created to show the strength of a pair of currencies as against others. In the same vein, the relationship between pairs of currencies is arranged concerning their weakness or strength. The indicator will assist a trader in no small measure in adding up the contradicting market trends.
The currency strength indicator is designed to be used on the Forex Meta Trader 4 (MT4) trading platform.
Figure 1: Currency Strength Indicator
When a particular currency is weak or strong, profitable trades can be generated in real-time under the time when the weakness or strength of the currency exists.
One-off the advantages of making use of this indicator are that it has the potential to lead a trader to high probability arrangements. When you notice that a particular currency is strong while another is weak, one could simply go for that currency pair with the application of a personal trading strategy.
When the market conditions are favorable, and you confirm the accurate signal that is produced and one that comes across as validated by the indicator, such setups can be traded with more confidence.
Application of the Indicator to trades
This currency strength indicator review also sheds some lights on the use of the indicator for trading. When you apply the indicator, you are inspired by the factor of being knowledgeable about how strong or weak the currencies are. And it is an edge that can, in turn, assist you in fine-tuning your technical analysis; as a result, mainly improve your present trading strategy.
This indicator is excellent if you happen to be a trend trader. Generally, traders fancy trading the trending markets instead of trading when the price is flat. More profits are accrued made when market trends are the strongest.
The indicator is pretty simple to decode, as displayed in the picture above. Based on how weak or strong a currency is at a time, the currency bars light up. Strongest currencies are seen with all the lights shown up to green, whereas the weakest currencies among them are shown in red.
Apply this indicator, and a trader doesn’t have to depend on other technical metatrader indicators. However, a trader could depend on candlestick patterns or chart patterns. Also, from the picture above one can infer that the strongest currencies include CHF, AUD, NZD, CAD, NOK, SEK, MXN, TRY, ZAR with EUR, JPY and USD being the weakest currencies.
The value of the currencies seen to range from weakest to moderate to strongest when the above chart is observed carefully.
The table below further puts the picture into perspective.
From the table, we can infer that trading market with the following currency pairs could produce a favorable outcome.
USDSEK, USDZAR, USDTRY, USDMXN, EURTRY, EURAUD – Short (sell) positions.
Having understood the above fact, the very next step is that you apply your favorite market trading strategy and make use of the trading signals as they come up.
Figure 2: Chart showing The Indicator Influenced Sell position for EURAUD.
Simple moving average indicator by means of the currency strength indicator.
The chart shown above is an intraday system for the EURAUD. The use of a long term, as well as a short-term moving average, is observed here. It is clear to see that depending on the strength of EUR and AUD pair, a short position can be taken given that strength of one pair is at the extreme, whereas the strength of the other pair is weakest.
It is not easy to identify high probability setups. As an example, look at the first picture and the table, it can be deduced that the strengths of JPY as well as GBP are immediately moderate. A trader can avoid trading these pairs or trading any pair that makes use of these two currencies.
Shown below is an instance of GBPJPY which happen not to be the strongest of pairs. It can be seen based on the wicks of the candlesticks that there is some sort of price volatility for this pair.
Figure 3: Chart showing the volatility of GBPJPY
GBPJPY – Dodging the unstable currency pairs
The currency strength indicator is updated in instantaneously, and it can tell the strength of currency as well as when it evolves. The indicator provides a good clue into understanding what currency pair(s) to avoid or trade.
Simply put, making use of the indicator, a trader can quickly identify trending pairs to trade instead of getting caught up with pairs that are moving (trading) sideways.
How does the indicator compare against Technical indicators?
This currency strength indicator review will not be complete without comparing the indicator against technical indicators. A frequently asked question with regards to the indicator is how the indicator compares with other Indicators.
It is similar to asking how oranges compare to bananas. Technical indicators are created depending on price. For instance, a moving average indicator is dependent on the average price of the currency that is being analyzed.
A Currency Strength Indicator takes into consideration the price of all currency pairs and goes further to determine the weakest and the strongest currency pairs. Obviously, the popularly used traditional indicators are quite different when compared to the currency strength indicator.
Traditional Indicators comparison with currency strength Indicator
Furthermore, traders often mix up traditional indicators with this indicator. The regular indicators like the RSI, stochastic oscillator or other technical indicators or tools like Fibonacci retracements or the Pitchfork often work with the price at hand. Making use of the, one can predict where the price is probable to reverse or retrace. As a result of this information and the technical indicators that a trader uses, he can decide whether to take long or short positions in the market.
The indicator, in contrast, provides additional information or knowledge about the markets. If a currency pair is traded in isolation, one cannot know for sure if the trend will last.
In fact, to understand if the currencies in the currency pair you are trading are strong or weak, analyzing almost all currency pairs offered by a Forex broker to arrive at the result would be the actual thing to do. The currency strength indicator does all the difficult task for you. It delivers it in a very simple to understand manner which of the currencies are strongest or weakest, hence can lead a trader in the right direction.
The indicator is comparable to the Forex currency pair scanner. Examining the weakest and strongest currency pairs, it becomes easy to filter out currencies that demonstrate the strongest trends, making them the favored ones to be traded alone.
Understanding the Indicator Using Currency Strength Meter
There are primarily two standard means of making good use of the currency Strength instrument:
1. Use as a trend –following instrument and
2. Use as a trend –reversal instrument
When making use of the Currency Strength Meter, each currency is analyzed individually instead of currency pairs the concept is to find out the weakest and strongest currencies to wisely choose the right pair of currencies to trade at a particular time.
The concept behind the Currency Strength Strategy remains to buy strength as well as sell weakness.
Furthermore, it means
1. buying the strongest currency as against the weakest currencies
2. Otherwise, selling the weakest.
Take a look at the Currency heat map below.
For instance, the weakest currency is the EUR from the chart and the strongest at the time is JPY.
The overwhelming expectation will be to sell the pair, EUR/JPY. It is similar to “trading in the direction of the trend” known as trading with the Momentum of the time.
Besides, Forex traders can also hold on until a currency shows a very severe strength reading with another currency showing severe weakness reading and then try to take a position (trade) a reversal.
The second method happens to be riskier since the currencies do not possess real inherent value. The risk is explained. Thus, the currency continues to grow from strength to strength (weaker and weaker), and someone will be stuck in an awful trade.
Trading Strategy using Currency Strength Indicator
To add to this review of currency strength indicator, we need to look at the trading strategy using the Currency Strength Trading indicator. Since it has the potential to make the average trader better. It can be deployed as a confirmation instrument or used as a standalone which is not usually advised.
Relying on intricate mathematical formula at the back of the indicator to measure the weakness and strength of a currency. It can be used to pair the currency that is the strongest with the weakest one, and an advantage is taken from both sides.
For instance, from the currency heat map indicator below, GBP is seen as the strongest currency, while CAD is the weakest currency.
If the two currencies are paired, we would have the GBP/CAD pair, as shown in the chart below:
As you can see, buying GBP/CAD, in this case, would have been a severe mistake.
Types of Currency Strength Indicators
This currency strength indicator review will quickly examine the types of indicator available. There Are Two Types of Currency Strength Indicators, and they include:
1. Real-Time Currency Strength Indicator
This is the type that displays the current prevailing Forex market conditions. Using this, the weakness or strength of a currency can alter over time.
Occasionally, some unforeseen news events can potentially have the capability to reverse the bearing of a currency. When such happens, a real-time currency strength indicator could easily demonstrate as and when a currency is weakening or strengthening.
2. Cyclical Currency Strength Indicators
This type of currency strength indicator conversely displays the overall depiction of the weakness or strength of the currency under consideration. It takes a lot of precious time for the cyclical currency strength indicator to bend to the prevailing market conditions.
However, the cyclical currency strength indicators function smoother. But will not identify any potential correction(s) or short -term market reversals of the currency being considered to you.
The currency strength indicator that is the focus of this post is a real-time currency strength indicator. It automatically adjusts or bends to the dynamic market conditions of the currency being considered. Hence, it lets you react swiftly to ever-changing market conditions.
Advantages of the Indicator
1. It eliminates double exposure. Forex Traders often lean to make use of correlations while their trading, which could lead many exposures in the markets. Various currency pairs behave differently. Hence, when a trader is exposed more often to a particular currency pair via correlation, it could create more risks. Using this indicator, this can be avoided, and focus can be made easily on the most trending pairs.
2. There is no need to hedge when using this indicator. It is closely related to the first part of correlation-based trading. Taking multiple positions with those in varying directions due to factors such as opposite correlations can lead to much confusion.
3. It can permit you to center on high probability systems dependent on the strength or weakness of the currencies being considered. It is not suitable for Counter-trend trading, which saves you from more risks.
Conclusion of the Currency Strength Indicator Review
So then, there you have it, the review of Currency Strength Indicator. We believe you gained a lot by reading it from the beginning to the end. In conclusion, the indicator measures the strength or weakness of a currency viz-a-viz all the currencies available with a Forex broker within the previous 24-hour period. It goes ahead to apply a logical calculation and allocate individual strength to currency and delivers the information in a very easy-to-understand as well use manner.
As regularly advised, this indicator is not one to be applied in isolation. Instead, it can complement a trader’s existing trading strategies as well as help to select the precise combination of the currency pair to trade.
There exist on our website other useful Indicators and tools for your trading profitability. Check it through this link and make good use of the materials you find there to succeed.