I once heard a professional Forex trader say that the currency strength meter is the greatest trading indicator a trader has. Personally I use the currency strength meter to get an idea of the currency pairs to trade, most of the time I pair the strongest currencies against the weakest currencies to get a strong trending market, also I avoid trading a pair of weak currencies or strong currencies together, though it has been helpful but the major problem I encounter while using a currency strength meter is that sometimes the currency strength meter tells me a currency is weak therefore I should look for opportunities to sell against a strong currency while price action on my chart tells me to do otherwise this always puts me in a difficult position.
How do you use your currency strength meter? let me know your thoughts on this thanks.
I almost never go against the strong/weak currency match-ups. So if for example GBP is strong I will almost never be short GBP.
The only case where I stretch the rule is where both currencies are closely linked and are both strong or both weak. For example AUD and NZD, or EUR and CHF, and sometimes EUR and GBP - in these cases using the strength of currencies across the whole market is superceded by the strength of a currency over its closest “relative”.
Hmm… thank you for sharing.
Using currency strength meter is not simply about pairing a strong currency against a weak one. For instance it does not give any valuable indication if the market is undergoing correction because of a recent spike. What I do normally is that I calculate the average score of the base currency against all the pairs and use this indicator as a filter mechanism. It is helpful in knowing which out of the 2 currencies paired together is actually causing the price to change. This information is needed in order to make better trading decisions.
Another thing that I have noticed with this indicator is, it works only on longer time frames. When I use the same broker and same pairs for trading and use CSM as the first analytical tool, I get widely different results on it while scalping and day trading. Like say I am using Fxview which is giving me 0.1 pips spreads on USDEUR while I am trading M5 using this indicator, and same spreads on H1, and currency values are more or less the same, I have gotten irrational signs on M5 while useful ones on H1. I have seen this happen even on XM. So the issue here is with the indicator.
Here’s my take:
Don’t use CSM on smaller charts.
Use it only as a filtration tool and nothing more.
Use other indicators for proper analysis.
It will be beneficial only in a somewhat stable market.
The best way to judge a currency’s strength is by observing its value over other currencies over many years. Supply, demand, inflation, and other economic factors will cause changes to a currency’s relative price. It is these changes that ultimately determine the strength of a currency.
A quick and dirty strength assessment can come from noting the D1 slope direction of an MA, e.g. 50EMA. Purely visual, no calculations, no spreadsheets, just look to see how many of the major charts have upwards or downwards-sloping 50EMA’s for your base currency of interest
I guess one factor here is to ensure that the timeframe basis of the SW analysis is compatible with the TA one is using. For example an SW calculation based on daily closes may conflict with other TA based on, for example, an hourly chart.
But, in principle, whenever and wherever there is a case of conflicting suggestions, the appropriate responsive course of action is “sitonhands”.
Simple but very efficient!
Thanks for that.
For this I look at the 28 major pairs. Each of the 8 major currencies figures in 7 of the 28 pairs. According to the EMA slope on each chart I give each currency a bearish or bullish point up to a maximum of 7: so if the slope is bullish for AUD in all 7 AUD charts, AUD scores 7-0, f they were all bearish it would be 0-7.
As of yesterday’s close, the most pronounced match-up would be AUD 7-0 v’s USD 0-7. This would suggest a long bias to AUD/USD.
Ok thanks alot
Thanks for this feedback
Thanks but I am an intraday trader. I don’t think an analysis made from years can really be of use to me.
Hmm very helpful thanks
Ok noted thanks
Absolutely! Fundamental aspects like the economic conditions of the country, inflation, trade statistics etc have a major bearing on the currency.
This is naturally true but study of these can only help with the longer term picture and does not work well in judging entries and exits levels.
It is also worth remembering that a currency’s strength or weakness is not an absolute factor, it is always relative to the other currency in a particular pair. And the relative fundamentals in the two currencies are sometimes very difficult to determine. A good example right now is the GBPUSD. The UK has just left the EU and it is unclear how its politics and fiscal policies and trade will develop in the future and, at the same time, we have a new governing party in the US and it is unclear how that will affect the same issues in the US.
So, although we may build a personal view of fundamentals, the actual measurement of the relative SW of a pair is still in the technical analysis of price movement.
Also I would say that the strength of the currency goes hand in hand with the people in the government. If the country is in recession or the economic policies of the administration are making the economy stagnant, obviously the currency value will go down.
The price action charts are one of the best indicators of the currency strength. If you are investing for the long term then price action charts can be very useful. I was doing long-term trade and during that time coronavirus had just emerged in China. When I saw over the upcoming days that the market is fluctuating tremendously I thought of pulling money out of the markets because keeping money in the market at such volatile times is a very huge risk. I was using Fxview for the long term because of their lower roll over rates and XM for the day trade. But now I am only day trading. Anyway, if you use only the zones indicator where the resistance is forming, from there only you can anticipate your trades.
Also I would add that currency strength is relative to the currency which you are going to swap. Alone currency strength would not matter because maybe it is losing value to one currency but stronger to another.
I was trading exotic pair i.e. USD/ZAR using Fxview and JPY/USD on XM, the relative value of Dollar was raising in conjunction with the yen but it was a different story with rand. So currency strength is important but when measured with the second currency.