Choosing the right currency pair to trade without using a currency strength indicator is one of the most difficult tasks for a forex trader. Trying to determine from the price chart which currency is strong and which is weak can be quite difficult and tedious. When you consider the impact of intraday noise or try to compare one currency to others, it becomes apparent that assessing the strength of different currencies can seem like an overwhelming task.
For example, the JPY may seem like the strongest of all major currencies on a 5 minute chart, but when you analyze it on an hourly or daily time frame, you will notice something else - perhaps the AUD will become the strongest currency. Thus, trying to analyze the strength of currencies based on pure price action often gives conflicting signals on different timeframes.
Obviously, price charts cannot clearly show the strength of a currency, so the currency strength indicator is specifically designed to compare the strength of multiple currency pairs. It is the secret weapon for successfully identifying the correct currency pair to trade.
What is a currency strength indicator Different types How to determine which to use How to create your own currency strength indicator without programming How to use the indicator correctly Mistakes to avoid when using it
How To Use The Currency Strength Indicator
The Currency Strength Indicator is a custom indicator that you can use to identify currency pairs that are currently trading heavily and those that are trading weakly. In other words, it is designed to showcase the strength of one currency pair over others. It uses either the exchange rates of different currency pairs or a specific price parameter to compare the strength of different currency pairs.
One of the best price parameters for calculating currency strength is the rate of change (ROC). Another parameter for measuring the strength of a currency is currency correlation, which compares how the movements of different currency pairs are related. Other parameters that people use to measure the strength of a currency include price-based indicators such as moving averages, RSI, CCI, and MACD.
So, there are different formulas for calculating the strength of one currency pair in relation to another, but some parameters and formulas may deviate from the central idea of testing how the exchange rate of one currency is compared to another. Thus, they can give misleading results that can lead to incorrect trading decisions.
There are many indicators of currency strength. In fact, any trader can easily create their own, with or without programming knowledge. Some indicators apply some kind of weighting to the parameters used in calculating currency strength, while some simple forms of indicators do not use weighting.
Some very advanced people not only use the percentage change in price over a period of time and apply some weights, but also aggregate prices from multiple timeframes to produce an indicator that is both effective and efficient for assessing the strength of a currency across all timeframes.
Currency strength indicators can be displayed in different ways: they can be displayed as a heat map, which shows major currencies on different timeframes and grouped by their strengths and weaknesses using color codes.
