Forex Currency Strength Meter - Technical Indicator for Traders
Since currencies in the Forex market trade as pairs in opposition to each other, imagine if you were able to know what currencies are strong during a certain time and what currencies are weak during that same timeframe. Well, with the Forex currency strength meter indicator, you can do this.
This tool enables you to make many useful insights that can be used to make profitable trades.
What is a Currency Strength Meter?
Put simply, a currency strength meter is a visual representation that shows what currencies are strong and what currencies are weak. Since currencies trade on the Forex market as pairs, you are buying one and selling another. Therefore, it is difficult to gain any insight from looking at a Forex pair currency in isolation. This is why currency strength meters exist, to give a visual representation of the relative value of currencies in relation to other currencies. The way a currency strength meter works is that it takes the relative strength of a currency with all the other currencies considered and produces a single value. Sometimes the algorithm or formula behind the currency meter will make the calculation of value using different weights to balance the significance of different currencies in relation to each other.
How to Read a Currency Strength Meter?
This depends a great deal on what currency strength meter you are using. Some of these indicators present the information in terms of a heatmap, while others show the currency strength in the form of a line graph. Still others only display line graphs of currency pairs and leave you to figure out what this means for any given isolated currency. Other currency strength meters are correlation matrices, showing you the exact correlation between each pair.
Why Use the Currency Strength Meter?
The currency strength meter can tip you off to several trading situations you should be aware of, such as the strength and weakness of a currency in relation to other currencies. Take for example that the USD (U.S. dollar) is the most powerful currency of the past 24 hours. Say, AUD (Australian dollar) is the weakest. That would logically mean the U.S. dollar (USD) has risen a great deal against the Australian dollar (AUD) in the past 24 hours. If you take a look at the chart of the AUD/USD pair, you would see that it is in a downtrend. This is because AUD is the quote currency of the pair (with USD being the base currency) and the price and the chart represent the price of AUD in relation to the USD. Since the AUD is weakening as compared to the USD, the chart is naturally trending downward.
You could easily see that a currency pair is trending downward just by looking at a chart of it. But looking at the currency strength index is sort of like looking at the standings, or fixtures of a sports league. It's easy to see who is ahead in a game, but by looking at the standings you can tell who is really good and who is really bad. So, it’s easy to pick out imbalances and ways you can take advantage of them in the market.
Simplification of Complex Interactions
Currency strength meters can compress a lot of information into a very efficient graphical representation. You can easily glance at a currency strength master as a sanity check to confirm if your trade makes sense given the relative strengths of the two respective currencies over the time period in question. The currency strength meter takes a lot of information and makes it very accessible to even an average trader.
Forex strength meters can tell you with just a glance that two currencies are correlated, which would make trading one against the other a bad move because they will either increase or decrease together, yielding no profit. Two pairs that are both very strong, but close together, may be good for range trading. If two currencies are pushing in vastly different directions, i.e., one is very strong and another is very weak—the currency pair involving these currencies is worthy of a closer look to see if this trend will continue or whether it is possibly primed for a reversal.
Different currency strength meters display information in different ways. Some simply display it in a line graph format, while others lay out the data as a heatmap. This heatmap style of currency strength meter usually shows the strength of each currency on a standard scale ranging from -10 to +10.
What are Common Issues with Currency Strength Meters?
Typical issues that can arise with currency strength meters range from performance issues to using them in an ineffective way. Sometimes these issues are not the result of the indicator itself but can be due to a poorly performing device or one that has fewer resources than average.
Freezing and Hanging
Since currency strength meters involve several currencies, it can be a heavy load on an interface when it comes to fetching the information over the network, which could entail significant delays.
Some currency strength meter software can have memory leaks, which cause the software or interface to allocate memory and not give it back to the system. This leads to a lot of memory getting wasted, which could slow down your system.
High CPU Utilization
Due to bugs, high CPU utilization can be a problem with currency strength indicators.
Using a Currency Strength Meter without Understanding How it Works
It can be very confusing to read a currency strength meter, especially considering there are so many different kinds. The key to effectively using a currency strength meter is to find one that you like and learn how to read it. Since the currency strength meter seeks to compress a lot of information in a small area, it can be confusing to read. Make sure you understand what the indicator is saying before you enter a trade based on your interpretation of its output.
Ways that the Currency Strength Meter is Used Incorrectly
Using a Currency Strength Meter for Buy/Sell Signals
The strength or weakness of a currency in relation to other currencies is not a buy or a sell signal. The strength or weakness of a currency can, however, be combined with other indicators to provide a buy or sell signal. That does not mean that you should buy or sell. Prudent traders will always confirm their buy and sell signals with other indicators and make a decision based on all available information.
Using Too Small of a Timeframe
Using too small of a timeframe doesn’t give the indicator a large enough to work with. When you get down into the 5- and 10-minutes charts, much of the price variation you see will be noise. As such, the information will be meaningless. Just because a currency was the strongest for the past five minutes, it does not mean that is significant for making trading decisions. Even scalpers who are looking to make money in a few seconds or minutes should drill down no further than the hourly charts for currency strength meter information.
How to Use the Currency Strength Meter MT4
Since MT4 is one of the most popular Forex trading platforms on the planet, it would be very convenient for there to be an indicator right in the software that tells you the relative strength of each currency. Luckily, such indicators exist and are provided by several different websites. One provided by FX Trading Revolution is called the Currency Strength Meter. It allows you to see at a glance in various time frames how each currency pair stands from strongest to weakest. It is somewhat cumbersome as it does not sum up each currency as being strong or weak. It just lists all the pairs and the relative strength between each pair.
Most currency strength meters are very simple to use. The parameters are simply the names of the currencies of interest. The specification of these parameters is usually handled by GUI components such as checkboxes, making the indicator very user-friendly.
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Finding the Best Free Currency Strength Meter
The currency strength meter provided by QuantumTrading is much better. Unfortunately, this indicator is not free. It provides not only each currency listed according to strength, but it also shows whether the pair is overbought or oversold. This is very useful, especially for swing traders. But it is useful to anyone as a signal that the upward trend may be at risk of ending. You could easily see this with an RSI indicator, but it is nice that it is integrated into the currency strength meter. This indicator is highly customizable. You can change what color represents each currency and change the number of RSI periods, among other features. If you can find a free one that offers these same features, that would be highly desirable. New indicators are being created for MT4 and MT5 every day, so something like that may be available at some point. But you can get by without it. Once you do find a currency strength meter that you trust, you will need to test it out and practice with it to ensure that it is an accurate currency strength meter for you to use with your strategy.
Finding the Best Currency Imbalances to Trade
The currency strength meter indicator is generally used to find two currencies that are far apart from each other in strength, but neither overbought nor oversold, find two currencies that are both about to experience a reversal of fortune or to find two currencies that are close enough in strength that their market is ranging. All three of these scenarios are highly tradeable. A currency strength indicator that includes the overbought/oversold information right there in the currency strength meter would be very good. However, you could also overlay the RSI indicator on the chart of any target currency pair and see similar information and be able to make decisions based on that. For example, you could find the strongest currency and the weakest currency and then look at a chart of the pair involving those two currencies. If the pair is overbought or oversold, you can investigate other indicators for confirmation that a reversal could be imminent. If the pair is neither overbought nor oversold, you could investigate whether the trend will continue using support/resistance or trendline analysis.
How to Suit the Currency Strength Meter to Your Own Strategy
Scalping is a very popular strategy that is used with the currency strength meter indicator. One strategy is to choose a strong currency and a weak currency, then investigate whether the pair of these two currencies is overbought or oversold. If not, then set up small trades seeking to gain 10 pips on every dip in that pair.
Another strategy is to find two currencies that are close in strength, which will create a ranging chart—channels formed by the support and resistance. When you find this condition, buy at the bottom of the range or sell at the top of the range. This enables you to take advantage of the sideways motion of the pair. More conservative traders might only buy when the stronger currency reaches the bottom of the range and simply close the trade when the pair reaches the top of the range, as opposed to selling the weaker pair on the way down as well.
The currency strength meter is also very practical for swing and long-term traders. You can identify the largest gaps in strength and weakness between currencies and then analyze that trading pair. So, you would use the currency strength meter indicator on a 4-hour or daily chart and you would find a currency pair that is overbought or oversold. Then the general idea is that you would find the pair composed of each of these currencies and buy the oversold currency while selling the overbought one. It is advisable to use support/resistance and trend analysis to time the trade well
Similar to the way it is used for swing trading, you would also use it for long-term trading, just with bigger stops and limits. If you have the currency strength meter pulled up on a weekly chart, it will take longer for the actual reversal to happen. Use other indicators and tools to time the trade. Looking at the weekly chart with the currency strength meter can show you the massive strength of long-term fundamentally strong currencies that the big players of the currency market—large banks—are taking advantage of.
The currency strength meter is a very powerful indicator. It summarizes the strength and weakness of currencies in a way that is practical and, when combined with other indicators like moving averages and Bollinger bands, gives incredible insight into powerful trends and stubborn support and resistance levels that keep markets ranging. The currency strength meter is useful for traders of all timeframes and styles.