Currency Strength Indicator: A Must-Have Tool for Forex Traders
Looking for a premium currency strength indicator? Choosing from a wide range of currency pairs to trade can be challenging. You may want to know the weak and strong currencies before making a trading decision. Sadly, many traders have trouble making the right decision. On our Currency Strength Meter site you will find all you need.
Alternative markets, geopolitics, and economic reports are some of the variables that influence a currency’s price and thus contribute to the complication. Your inability to make a choice can hurt your trading performance and possible returns.
You can overcome this challenge and pick the right currency pairs to trade with ease with the aid of a currency strength indicator.
A currency strength tool, also known as a currency strength meter shows traders the place of a currency in the market. To measure a currency pair, the premium forex indicator compares several currencies’ exchange rates for a comprehensive comparison.
How does the Currency Strength Meter Work?
The strength indicator read every forex pair over a 24-hour time frame and calculates each reading. It then combines associated pairs into a currency and finds the currency’s strength. Currency strength meters measure the strength of the main currencies such as the USD, GBP, JPY, AUD, EUR, CAD, CHF, and the rest.
The entire process requires five steps. These are:
- Identify the base currency
- Match the base currency with Forex pairs
- Calculate each paired currency’s relative strength
- Calculate their average score
- Use the calculation result
How to use the Currency Strength indicator
Note that while you may be tempted to use the indicator to define a strong currency and start trading it, that’s not the best approach. Rather, use the currency strength meter to identify a currency pair’s strength or weakness before deciding whether it is worthy of your investment or not.
Better still, determine the currency that may independently appreciate enabling you to determine the currency pair that may potentially have a positive price change.
As a trader, understanding the relationship between individual currency and currency pairs is the key to a successful Forex trading experience.
For instance, if a GBP/USD pair is rising, that may not necessarily mean that the USD is weak, the GBP may be strong. Your ability to determine a pair’s strength will go a long way in helping you trade with confidence. It also enables you to focus on currency pairs that are doing well in the market, those with a high break-out potential in comparison with other currency pairs.
Therefore, before you take a trading position in any currency pair, determine the currency strength first.
The rule of thumb is to buy strong currency and get rid of the weak. For instance, if a currency is strong and the other suddenly become weaker, that’s a signal for a trading opportunity. The deviation between currency pairs shows strong momentum you can tap into.
However, if both currencies are strong, weak, or average, expect a sideways or range move. The inconsistency is a red flag: steer clear of such currency pairs.
When trading a currency pair, you are simultaneously selling/buying one currency and buying/selling another. The rule of thumb is to buy the strong currency against a weak one and sell the weak one currency against the strong one.
Benefits of Using Currency Strength
If you are trading the forex market, the currency strength indicator is one of the tools you need for effective trading. The indicator offers these benefits:
- It is easy to use: Simplicity is a currency strength indicator’s major strength. It has an easy learning curve and thanks to its simple graph, you can easily deduce which of the currencies are performing poorly or well. Thus, you won’t spend a lifetime trying to understand how the indicator works and how to use it.
- It signals high-risk trades: The indicator can prevent you from taking unnecessary trading risks by providing you with an up-to-date status report about some individual currencies and currency pairs.
Simply put, you have a trading tool that gives you a list of high-risk trades so that you can avoid them. That’s unarguably one of the best ways to avoid trading pitfalls and increase your chances of making high returns on your investment.
- It saves time: Forex trading can be time-consuming if not done right. You can spend hours on end on market analysis before you get the information you need to trade. You can save much time by using the currency indicator as the simple tool helps you with the analysis. You only work on the result of its analysis.
- It filters currency correlations: Trading multiple pairs requires that you understand that currencies may have a positive or negative correlation. The currency strength tool relieves you of the stress of factoring this into your trading plans because the indicator will show you the currencies’ status, either weak or strong.
These are numerous benefits that a currency strength tool offers. Trading with the help of an indicator will have a significant impact on your trading performance and results.
Pitfalls to Avoid When Using Currency Strength Indicator
Undoubtedly, a currency strength is a powerful trading tool. However, much depends on your knowledge of the indicator and usage. For the best result, avoid the following pitfalls that have cost many investors their money and investment:
- If you are a new trader, you probably may consider trading with the currency strength tool only. That’s a grave mistake because the indicator alone won’t give you the desired result. Thus, you should pair it with other chart analyses and indicators to maximize its benefits.
- Another mistake you should avoid is not calculating a currency’s strength in contrast with other major currency pairs available for trading. For instance, for a major currency to be strong, its strength will be compared with other major currencies such as GBP, EUR, and others. If you don’t make this comparison, you may make a costly trading mistake.
- Don’t use a currency indicator without knowing how it works. This is a no-brainer. Without a clue about how the indicator works, you are prone to misunderstanding its readings and that may have a dire consequence on your trading decisions. For instance, if you misunderstand the message an indicator convey, you may open a sell rather than open a buy.
- Using short time frames only is another mistake you should avoid at all costs. Strength meters perform better and give more accurate readings when they are used over a long time frame. You may decide to use the trading tool for some weeks or months and see the result. That’s a surefire way to get accurate currency strength for trading.
Sometimes, the market may suffer a temporary disruption caused by a negative event or news. Such disruption may influence instruments’ prices in a short time. If you choose the short-time trading option, the disruption will affect a currency’s strength and by extension, your trading activities.
However, if you trade for a long time, which gives the market enough time to recover from the temporary setback that may be occasioned by the unfortunate incident.
Note that all things being equal, your success with the currency strength is also dependent on your trading timeframe. This highlights why the longer timeframe is more promising than the shorter timeframe.
Helpful tips for using the Indicator
Undoubtedly, the currency strength is a great tool every trader must learn how to use effectively. As a trader, the following tips will help you use the currency strength to the fullest:
- Diversify your portfolio
With the help of the currency strength tool, you can diversify your portfolio to maximize your profit potential. For instance, open a trade with a currency that is gaining momentum and another trade with a currency that’s gradually losing its steam. The strategy can help you minimize your losses, although it doesn’t guarantee you risk-free trades.
- Watch what you trade
Some traders trade negatively related currencies if they are in the same direction. Since you’ve known that currency pairs most often move in opposite directions, opening a trade in the same direction isn’t advisable.
Sometimes, though, the currencies in a pair may be strong, resist the temptation to open the same trades on such currency because the pairs will eventually move in opposite directions.
Bottom Line On Currency Strength Indicator
Currency strength indicators are undoubtedly powerful trading tools. Numerous trading strategies adopted by traders from across the globe are based on this tool.
Understanding the concept of Currency indicators and their associated strategies will make a significant difference in your trading skills and outcome. And if you are looking for additional tools and indicators, browse further through our site, as we have variety of tools, and resources that will cover the inadequacies and hone the Forex trading skills for traders.