Have you ever heard about Currency Strength Indicators, sometimes also called Currency Strength Meters? They are indicators that show the strength of individual currencies. In this article I will show you what is a Currency Strength Indicator, how it works and how you can integrate it in your trading.
As you well know in the Forex market we always work with Currency Pairs, but what if we want to measure the absolute strength of a currency, “disconnecting” it from a specific pair? In other words, how can we estimate the strength of a currency in the market?
The purpose of the Currency Strength Indicator (or Currency Strength Meter) is to show the strength of the individual currencies in the market in order to understand which are the strong (or getting stronger) and which are the weak (or getting weaker).
If you want to try a Currency Strength Indicator for MetaTrader 4 you can check the one I created.
How a Currency Strength Indicator (or Meter) Works
There isn’t a unique formula to estimate the strength of a currency in the market, but there are a few ways to approximate it. It is very common in this case to use other existing normalized indicators and combining them together in order to calculate the strength of a specific currency.
For example, if we want to know the strength of the EUR we can consider all the pairs involving the EUR, like EURUSD, EURGBP, EURJPY, EURAUD, EURNZD, EURCAD, EURCHF, take the same indicator and see its value in each pair, then combine the values together with some formula to get a total or an average. Doing this for each currency you will obtain comparable values and you can draw lines of these to make it more readable.
How does it look like?
Usually a Currency Strength Indicator is composed of lines fluctuating around an horizontal line (zero level). These lines can be smooth or rough depending on the algorithms and parameters used.
How to use a Currency Strength Indicator
A Currency Strength Indicator is a very useful tool but I recommend to use it together it some other indicators or price action in order to validate entry signals.
Using a Currency Strength Indicator is quite easy:
- A line the is above another line usually means the related currency is stronger than the other, especially if a line is above zero and one below zero
- A line pointing upwards means that the currency is gaining strength
- A line pointing downwards means the currency is becoming weak
As a general rule you always want to buy the strong and sell the weak.
You can integrate the Currency Strength Indicator in your own strategies and style or if you want to learn a strategy involving the Currency Strength Indicator I can suggest you the course Forex Trading – Learn An Effective Forex Trading Strategy, it is very interesting if you never heard about Currency Strength before.
Where to find the Currency Strength Indicator
There are some Currency Strength Indicators on the web, both free and commercial, some are in the format of a matrix but I prefer graphical tools like the one above. I needed a versatile and complete version of the indicator and I couldn’t find anything with the features I needed so I programmed mine, you can check it out here.
If you are new to the Currency Strength Indicator I would suggest to spend some time understanding it and considering its use in your strategies. In my opinion the currency strength indicator is a valuable tool to spot trading opportunities. Instead of showing the value of a currency in relation to another currency a currency strength indicator will show the strength of a currency in the market in a normalised way and calculating values in all the pairs involving a specific currency. You can use this indicator with different trading styles. To test my indicator please go to the link provided above.
I hope this article will help you and should you have any doubt or feedback please comment below.
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