In this article, I'll explain what currency strength meter (CSM) is and how to take advantage of this amazing little tool, because once you start using it, you won’t take another trade without it!
July 29 2020 | AtoZ Markets –A currency strength meter measures a currency's relative strength in comparison to other currencies. A forex trader must settle on which pairs to trade from the many available.
For example: You’re bullish on the Euro but you have to choose between trading the major currency pairs. A forex strength meter can help you make that choice.
What is a currency strength meter?
It is a technical tool that helps forex traders make informed decisions about the best time to buy or sell currencies. Unlike indicators, which show the direction and strength of a trend, the CSM indicates when to buy or sell currencies.
So, the Relative Heat map displays currency strength in a dynamic, up-to-date manner that is based on relative price changes over time. It is also known as the Currency Strength Indicator (CSI).
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How to use Forex strength meter?
The currency strength meter enables you to focus on pairs with high breakouts, while avoiding those that are trapped in a sideways trend.
In trading, the strong currency tends to become stronger and the weak currency weaker. In order to be able to trade currencies effectively, you must understand how a currency's strength is determined.
The art of matching up strongest vs weakest
A trader should always trade the strongest currency against the weakest when trading in the forex market. The strength or weakness of a currency can result from short-term demand and supply, but it can also be caused by economic announcements such as interest rates and gross domestic product (GDP).
Related: Pair A Strong Currency Against A Weak One
How does the Forex strength meter work?
The Forex strength meter measures a currency's strength by averaging the number of times it has been paired with other currencies over the previous day. It then ranks all of the associated currencies and finds their current level of strength.
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How to use the currency strength meter table to find the best currency pairs?
The trading idea behind the indicator is to buy strong currencies and sell weak ones. If a currency pair is in an uptrend, you can determine whether the uptrend is due to currency A’s strength or currency B’s weakness.
- Green boxes show which currencies have fallen against the base currency.
- Red boxes indicate which currencies have risen.
- Grey boxes indicate minimal movement.
When both currencies are strong or weak, there may be little opportunity for trading.
When purchasing foreign currency, you are making two transactions at once. You are selling the home currency and buying the foreign currency.
Advanced currency meter
Every successful forex system has the following basic components: the ability to recognize the trend direction, the ability to ascertain the strength of the trend and answer the question as to whether or not the market is trending or in a range, and the ability to identify safe entry points that will give a perfect risk-to-reward ratio in every position.
What is the direction of the trend?
The indicator allows you to view the direction of the trend for all currency pairs in one window. It has two basic panels: one shows the strength of different currencies, and the other displays trends and strengths for currency pairs. Whenever an arrow is pointing up, it indicates that a currency is strengthening; whenever an arrow is pointing down, it indicates that a currency is weakening.
What is the strength of the trend?
Advanced charts help novice traders determine the direction of a currency trend. Arrows indicate the direction of a trend; no arrows are displayed when the currency pair is trading in a range.
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Conclusion
In this article you’ve learned that an indicator calculates the half of change in price to rank currency pairs from strong to weak. It doesn’t tell you when to enter a trade, but it does help you filter for potential currency pairs to trade.
Using a technical analysis tool helps traders determine which currencies are rallying and which are falling so that they can form the basis for their currency trading methodologies.
Should you use the currency strength meter on your own at all?
Before you start trading with a currency strength meter, you'll want to read this.
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The article was updated by Samson and originally published on 19 May 2020 and updated on 29 July 2020.