Have you ever used the currency strength meter in your forex trading? Don’t worry if you haven’t. We shall tell you about the tool in this article. The concept of currency pair is one aspect that differentiates the forex market from other financial markets. The moment you decide to trade on the forex market, you are exposed to 2 different currencies; thus, you can measure the strength and weakness of each currency using appropriate mathematical calculations.
On the FX market, judging the performance of a single currency in isolation is quite complicated. If you are bullish on EUR, and you have the option of trading EUR/JPY, EUR/CAD, EUR/NZD, EUR/AUD, and EUR/GBP, how do you decide which currency pair has the weakest or strongest value? This is where a currency strength indicator comes handy.
This tool will help you identify which currency pair has the weakest or strongest currencies to choose the right currency pair to trade. The tool is available on both the MT4 and MT5 trading platforms.
In this guide, we would be talking about mistakes to avoid when using a strength meter, how to use the currency strength meter, and how to tweak this tool to suit your trading needs. But before we dive deeper, let’s quickly explain what a strength meter is for the benefit of those that are new to forex trading.
What Is a Currency Strength Meter?
A currency strength meter is also referred to as a currency strength indicator. It is a visual tool that helps traders to identify which currency is strong or weak. It uses the prevailing exchange rate of the different currency you want to measure to display the strength or weakness of the currencies.
While a simple currency strength indicator may not necessarily use any weighting to identify the strength/weakness of a currency, an advanced meter may apply its weightings before displaying results. To get the best from this strength indicator, you can combine it with a technical indicator to provide you with trading signals.
How The Indicator Works
The currency meter indicator shows the correlations between different currency pairs on the market.
Some of the popular currency pairs include:
1. GBPJPY – Great British Pound to Japanese Yen
2. GBPNZD – Great British Pound to New Zealand Dollar
3. USDCAD – United States Dollar to Canadian Dollar
4. EURUSD – Euro to United States Dollar
5. EURCHF – Euro to Swiss Franc
6. GBPUSD – Great British Pound to United States Dollar
7. EURGBP – Euro to Great British Pound
8. GBPCHF – Great British Pound to Swiss Franc
9. EURCAD – Euro to Canadian Dollar
10. GBPAUD – Great British Pound to Australian Dollar
11. USDJPY – United States Dollar to Japanese Yen
While a positively correlated pair usually moves in the same direction, a negatively correlated pair moves in the opposite direction.
Below are the 4 correlations divided according to their strength:
1. Red: a strong correlation
2. Orange: medium correlation
3. Blue: weak correlation
4. Green: little or no correlation
Currency Strength Indicator allows you to see how weak or strong a currency pair is at a glance. Positive scores mean that the currency pair is strong. Similarly, negative scores mean that the currency pair is weak.
Let’s see what the data means:
1. Positive Green:
Positive green means there is no correlation. Currency pairs in this position will move independently in different directions.
2. Negative Green:
Negative green means little or no correlation. Currency pairs in this position will move independently in different directions.
3. Positive Blue (up to +30):
This means weak correlation, and the currency pairs will move independently with the potential for profitability.
4. Positive Blue (up to +49):
Positions on these symbols may be similar and may come with similar profit. Opposite direction position may offset each other.
5. Negative Blue (up to -30):
This means a weak correlation. Currency pairs in this position will move independently but with a potential for profitability.
6. Negative Blue (up to -49):
Positions on these symbols may be similar and may offset each other. Opposite direction positions may have a similar profit.
7. Positive Orange (up to +75):
This means medium positive correction. Positions on these symbols may be similar and may come with similar profit. Opposite direction position may offset or cancel each other.
8. Negative Orange (up to -75):
Negative orange means medium negative correlation. Positions on these symbols may be similar and may offset or cancel each other. Opposite direction positions may have a similar profit.
9. Positive Red (up to +100):
This correlation means a strong positive correlation. Positions on these symbols may be similar and may come with a similar profit. Opposite direction position may offset or cancel each other.
10. Negative Red: (up to -100):
This implies a strong negative correlation. Positions on these symbols may be similar and may offset or cancel each other. Opposite direction positions may have a similar profit.
Issues with Strength Meters Indicator
A poorly coded currency strength Indicator, is, unfortunately, laden with a number of issues. Regardless of its features, if the strength indicator meter you are using is not giving you accurate strength indicators, then it has no real value.
If the indicator is poorly coded, you are likely going to have the following issues:
1. Memory leakage
2. Whipsaw signals
3. PC freezers
4. The MT4 trading platform may freeze
5. CPU working optimally at 100%
What Mistakes Should I Avoid Using This Tool?
If you Google the term “currency strength meter,” you’d be amazed to see a whopping 8.3 million results. That’s crazy. But what is more insane is the fact that out of all of these results, none of them will tell you the mistakes to avoid when using a strength meter.
This has cost so many traders their hard-earned money, even when they are in possession of a GPS. Without further ado, some of the mistakes are:
Mistake #1: Learn the Formula Behind the Tool
So many traders are fond of making this mistake while using a currency strength indicator. This tool is like any other indicator on the FX market used for trading. There is a mathematical formula behind it.
If you don’t know or understand the formula, how then will you trust the results of the tool? What if the tool is meant to work only on a specific timeframe and you use it for a lower timeframe? No matter the indicator you are using to trade the FX market, it beholds on you to learn the formula behind the tool so as not to lose money.
Mistake #2: Using the Tool as a Buy/Sell Signal Generator
Sometimes, traders misuse the currency meter indicator. For example, we have seen traders use the tool to identify a strong currency, but they immediately place a buy order thinking the price will increase – big mistake to avoid.
For the records, the currency strength indicator is not designed to generate buy/sell signals. And that’s why you need to combine it with a technical indicator to help you track price movement and market trends.
Mistake #3: Believing That the Tool is Not Prone to False Signals
The last mistake traders usually make when using this indicator is that they believe the indicator is not prone to false signals. However, from our experience, we can categorically say that the strength meter indicator is prone to false signals.
Here is why:
A currency strength indicator calculates the price change over a specific period to determine the currencies that are strong or weak. On the lower timeframe, this calculation is prone to false signals.
The reason is that news release during the day can lead to a spike in the currency price, which may mislead you into fake strength/weakness of currency pairs.
How To Make A Currency Meter Indicator Without Coding
All the currency meter indicators you see on the market are created similarly, and they work in the same way. The idea is to identify a strong or weak currency after calculating the price change over a specific period.
To start with, create a list of different currency pairs and calculate the percentage change in the past 15 weeks. Use the value to rank your list starting from the strongest to the weakest. If you can do this, the screenshot below is how your result should look like (using major currencies).
If you are a professional, you can get exotic pairs like USDRUB, USDTRY, USDZAR on your list to have more currency pairs to trade.
Tweaking the Tool
You can avoid false signals by using weekly prices to identify the weakness and strength of a currency. But as a short-term trader, this arrangement may not work best for you.
So, what now?
You can tweak the tool to suit your short-term trading cravings.
Below is how to do it:
1. Use 4-week ROC if you trade below the four hours’ time frame.
2. Use 15-week ROC if you trade between the four hours’ time frame.
3. Use a 30-week ROC if you trade above the weekly timeframe.
Benefits of Using the Currency Strength Meter
There are so many benefits inherent using this tool – from its simplicity, avoiding unnecessary hedging, availability to its usefulness as a short-term trade indictor, ability to signal high-risk trades, as well as it helps to eliminate double exposure.
Let’s explore a bit more on the benefits of using the strength meter:
1. Best for short-term trades: if you seek an indicator to use in a short-term trade, the currency strength indicator is perfect for you. The indicator will easily tell you which currency pair is increasing in value and which one is not so that you can make a trade decision. You can also verify signals generated by other technical metatrader indicators.
2. Ease of Use: the indicator is very easy and straightforward to use. You don’t have to be a veteran trader before you understand how the indicator operates.
3. It is available for free: One good thing about the strength indicator is that it is always available for free. You won’t pay any fee to download and install the app onto your MT4 trading platform.
4. Removes unintentional hedging: You can avoid unintentional hedging if you know the correlation strength between different currency pairs in advance.
5. Entry and exit point: Another benefit of using the strength meter is that it enables you to determine when to enter a trade position and when to exit to make the most profits.
6. Combining with other indicators: The indicator can combine perfectly with other indicators like the resistance and support indicator, MACD indicator, and gap indicator, among others.
How to Use this Indicator
Pair the lost potent currency with the weakest currency to get a trending market. The screenshot below shows that JPY and GBP are the strongest and weakest currencies, respectively.
When you pair these currencies, you get GBP/JPY. From the chart below this currency pair is in a strong downtrend.
Keep in mind that this indicator doesn’t generate buy or sell signals; instead, it helps you identify the best currency pair to trade.
You can get other indicators like pullback, breakout, support and resistance, and candlestick patterns to enjoy buy/sell signals.
Conclusion Currency Strength Meter
If you are passionate about determining the strongest or weakest currency pair before you enter a trade position, then download and install the currency strength indicator onto your MT4 or MT5 trading platform.
The tool displays in real-time the weakest and strongest currencies for you to choose from. Adding this tool to your MT4 trading platform is a no-brainer if you aspire to become a veteran trader anytime soon.
Like we always emphasize, do not use an indication in isolation. To get the most out of the FX market, combine the tool with other technical indicators like the support and resistance indicator, breakout indicator, MCAD indicator, and Stochastic Oscillator indicator.
The good news is that we have all of these indicators here on our website. You can find it via this link, so feel free to check them out and enhance your strategy.