i. It is a tool that shows how strong and weak currencies are.
ii. Traders use this tool along with correlations and look for trade opportunities.
What is a currency strength meter?
There are many currency pairs to trade but traders have to identify the currency pairs that show strength.
You cannot just pick any random currency pair and expect to find trade opportunities.
The currency strength meter allows traders to find such currency pairs that show strength.
The currency strength meter gives a visual representation of the strength and weaknesses of each currency.
We trade currency pairs on the forex market. The price of the currency pair increases when the base currency strengthens as compared to the quote currency.
Hence traders can use the information from this tool to plan their trades in a manner that allows them to fully capitalize.
The main idea of the currency strength meter is to use it as a filter. You can use this tool to spot the best currency pairs to trade.
Read ahead to understand how the currency strength meter actually works and how you can use it to your advantage.
How does the currency strength meter work?
The currency strength line meter is no magical tool, it is just a tool developed by fellow traders to help them take trades.
We know that it is a visual representation of the strength and weaknesses of the various currencies.
This tool will have a maximum and minimum value, which is normally 0 and 10, and the different currencies will have different values.
If you search for a currency strength meter on Google, you will find that different platforms have their own version of it. These versions will have their own calculation to derive the values.
So what the currency strength meter basically tracks is the movement of the currencies within the last 24 hours.
Price data of all currency pairs are fetched and price change is calculated. This price change is usually calculated from the day open.
Once this step is done, it becomes easy to determine which currency has gained strength and which currency has become weaker.
This is as basic as the currency strength meter can get but as I mentioned there might be additional calculations that can be added.
You can track price movements over a longer period too, it all depends on what works for you and the timeframe you trade on.
If you trade smaller timeframes then you should have a smaller lookback period, while if you trade on longer timeframes then you will need a longer lookback period.
Now, the platforms that provide this tool will not reveal their so-called proprietary formulas, and it is totally fine.
You do not have to master the calculations part of this tool but rather have to understand how to make the best out of the end product.
How can you use the currency strength meter?
Supposing you opened a currency strength meter indicator and you see that USD is strong and EUR is weak. What do you do?
You would look for shorting opportunities in the EURUSD currency pair.
If the USD was weak and EUR was strong, then you would look for buying opportunities in EURUSD.
The currency strength meter makes use of the correlation principle.
Correlations allow traders to determine how one currency is performing in relation to another.
Using the currency strength meter tool can be used to trade this too.
One thing to be careful of while using this tool is that you should not trade a currency pair in which both currencies are showing strength.
For instance, if both USD and EUR are strong, then how will you trade EURUSD?
It becomes very difficult to trade this currency pair in such conditions.
Hence, look for currencies that are showing opposite characteristics and then take trades accordingly.
There are two ways you can use the currency strength meter to take trades.
1. Trend riding
If you just look at the currency strength meter then you can easily understand the trend direction of the currencies.
If the tool shows that EUR is strong and GBP is weak, then you know that the EURGBP currency pair is bullish.
You should not straight away fire away a buy order for such currency pairs.
Through the currency strength indicator, you just know the trend, and based on this information you should look for trades in that direction.
You should have some strategy or setup that will give you entry signals. The currency strength meter should not be your trade signal.
2. Trend reversal
Any currency that is strong at the moment will not always stay strong and there will be a time when the trend will reverse. The same is the case if a currency is weak.
The currency strength meter may show strength or weakness in a currency but strength can become weakness and vice versa.
You can look to take advantage of this and capitalize on the trend reversal.
Look for currencies that are showing strength or weakness and keep track of them.
Just when the currency strength index shows a reversal, you should look to trades in those currencies accordingly.
It should be strictly noted that the currency strength meter is nowhere near a holy grail.
It is not a standalone tool and traders should not take trade calls solely based on it. You have to use it to identify the currency pairs that have the potential to move.
Once you have identified such a pair, you then have to apply your analysis or strategies and look for trades in that direction of the currency strength meter.
What are your thoughts on this?
Do you use this tool to trade and how has it worked out for you? Do let us know in the comments section.
Share this blog post will every trader you know and let them also explore this tool and unlock the new potential in their trading.
Feel free to ask questions regarding the content we upload and we will get back to it at the earliest.