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 – What is a currency strength meter and in what way does it work? Now, one among the many struggles of a forex trader is you’ve got many currency pairs to settle on from. For example: You’re bullish on the euro but, you’ve got the choice to trade: EUR/USD, USD/JPY, EURJPY, AUD/USD, USD/CAD, etc. So which currency pair does one trade? Well, that’s where a Forex strength meter comes into play.
What is a currency strength meter?
Currency strength meter is a forex traders technical tool, not an indicator. CSM shows an at-a-glance view of what is going on in the forex market. The main difference between the technical tool and technical indicators is that the former shows “when to buy” and the later guides “what to trade”.
So, the currency strength indicator is a technical indicator that displays the Relative Heat map. It shows the percentage change in the price of various currencies against each other over time. It is a dynamic Heatmap which updates regularly.
How to use Forex strength meter?
Currency strength meter shows the strength and weakness of all individual currencies so that you can focus on the currency pairs which have high breakout potential compared to others.
Like they say, “The rich get richer and the poor get poorer.” As like that in trading, strong currency moves more stronger and becomes strongest and the weak currency goes weaker and weakest. Therefore, a currency strength must be determined before taking a trading position in currency pairs.
The art of matching up strongest vs weakest
It is critical for Day traders to know which currencies are strong and which ones are weak when trading in the forex market. These strengths or weaknesses could be a result of short-term demand and supply but can also be caused by economic announcement results. Ideally one should always trade the strongest currency against the weakest currency.
Forex strength meter explained:
The strength of a currency is determined by its performance compared to other currencies. If one currency moves heavily on the positive side and the other moves on the negative side. The first one is the strong currency and the second one is a weaker currency. Normally currency strength meter indicates which currencies are strong and which are weak.
It is difficult for forex day traders to find which currencies are strong and which one is weak when trading in the Forex market.
The strength and weakness of currency could be as a result of short-term demand and supply but can be caused by the economic announcement.
Ideally, One should always trade the strongest one against the weakest.
See where your currency ranks against other currencies traded against it:
How does the Forex strength meter work?
The Forex strength meter takes readings from all currency pairs over the last 24 hours and applies calculations to each. It then bundles together each associated and finds the current strength of the individual currency (eg, EUR/USD, GBP/USD, USD/JPY, EUR/GBP, AUD/USD etc).
How to use the currency strength meter table to find the best currency pairs?
The very basic trading idea behind the indicator is, ” To Buy Strong Currency And To Sell Weak Currency” If A/B is a Currency Pair is in an uptrend, you are able to determine whether the uptrend is happening due to A’s strength or B’s weakness.
- Green boxes show those currencies that have fallen lower in value against the base currency.
- Red boxes show those currencies that have risen lower in value against the base currency.
- The Grey boxes indicate minimal moves.
- The lighter the color, the smaller the movement against the other currency; the darker the color, the greater the movement.
It is a quick guide to find out which currencies you might want to trade and which might be worth staying away from. For example, if one currency is very strong, and another suddenly turns weaker, you may find a trading opportunity. Such deviation between currency pairs indicates strong momentum. Conversely, if both currencies are weak, strong, or average strength there is often a range or sideways move happening. You might want to stay away from playing those currency pairs.
When placing an order in the currency market one should realize that you are actually doing two transactions at the same time. Buying/selling one currency and selling buying the other.
Advanced currency meter
Every good forex system has the following basic components:
- Ability to recognize the trend direction.
- Ability to identify the strength of the trend and answer the basic question, Is the market trending, or is it in a range?
- Being able to identify safe entry points that will give a perfect risk to reward (RR) ratio in every position.
What is the direction of the trend
With Advanced currency strength meter, you can easily view the direction of the trend for all currency pairs in one window. It has two basic panels: one of the panels contains the strength of different currencies and the other shows the trend and strength of the currency pairs. Whenever the arrow is UP, this is an indication of buy trend and whenever the arrow is DOWN, this is an indication of a downtrend.
What is the strength of the trend
With advanced currency meter, you can easily ascertain the strength of a trend even if you are a novice. Whenever a currency pair is trending, an arrow is displayed to indicate the trend direction. Whenever a currency is in a range, the arrow is deleted to indicate that there is no direction.
So far, you’ve learned from this article that: (1) a currency or Forex strength meter calculates the half of change in price to rank currency pairs from strong to weak. (2) A currency strength meter doesn’t tell you when to enter a trade, it only helps you to filter for potential currency pairs to trade.
That said, using a Forex strength meter, really puts the odds in your favor, as you then have a much clearer understanding of what is rallying and what is selling off, across the board, and should always form the basis of any currency trading methodology. Good luck trading.
The article was updated by Samson and originally published on 19 May 2020 and updated on 29 July 2020.