Trade Using a Forex Currency Strength Meter
Did you know that the strength of a currency pair can be measured? Did you know that the parameter obtained can significantly increase the percentage of profitable operations? Many believe that the main task of a trader and the key to his successful trading is his ability to predict the market trend. As we know, the direction of the currency market is determined by the struggle of currencies. The market is moving towards a stronger monetary instrument. A trader can measure the strength of coins by using a simple currency strength meter.
This same indicator is designed in such a way that it shows weak and strong currencies in any outlined time period, showing that with the help of a matrix. Implementing a currency strength meter in your trade analysis gives you a more practical equipment that will increase your chances of becoming a flourishing trader.
Therefore, today we will provide valuable information about the nature of the strength of the currency, including the correlation of different currencies. In addition, you will learn how to use the correlation matrix to improve your trading results, as well as how to benefit from the Currency Strength Meter. Have some coffee and let’s get started.
What is a currency force meter?
Before moving on to the correlation between assets and the implementation of the indicator itself, let’s find out what a currency strength meter is. Then we can proceed.
Basically, a currency strength meter is a demonstration model that shows which of the currencies are currently strong and which are weak. This indicator makes use of the exchange rates of various Forex assets to generate compound, comparative strength of each currency.
The calculation is performed on all pairs in which the currency is involved.
For example, to measure the strength of USD, the currency strength meter will calculate the strength of all assets, including USD (USD / CHF, NZD / USD, GBP / USD, AUD / JPY…) and then add these results together to get an aggregate score for the US dollar.
Much less popular, but a more complete gauge is the comprehensive USD index. It may be more useful for some traders as it applies a larger variety of Forex assets. They both operate the same way.
Therefore, the trader only needs to select the strongest and weakest currency in a certain period of time and assume its subsequent movement, using additional filters. These filters can be usual stochastic, or the use of significant levels, or Fibonacci retracement.
However, it is important to analyze each specific situation individually, because often when we begin to identify the strongest and weakest pair, their rise and fall are already over, and there may be a setback in both. Therefore, it is recommended to check additional signals and not neglect the classic technical analysis, as well as read the recommendations for these coins shortly.
Problems with monetary resistance meters
As a trader, you probably faced a situation where something was not working in the trading terminal due to some reasons, especially when it comes to dragging the indicators to the chart. Unfortunately, it happens all the time with numerous custom indicators, just because they are not written in the best way. In case there is the same situation with the currency strength meter, and if it provides incorrect values, it will not be something you need for successful trading. Using the currency strength meters that were created a long time ago, you may have the following problems: trading platform or computer freezes, crashes, memory downtime messages, CPU at 100%.
Some indicators downloaded from the Internet can sometimes be based on concepts that have nothing to do with the Currency Strength Meter. Others may include some smoothing indicators, such as MA. By attaching filters at the top to illustrate the currency strength meter, you may be receiving false trade signals. As a result, you will open positions that you should not open and will encounter some monetary losses.
Alternatively, most traders agree that correlation has proven to be the best method to measure the strength of the currency. It should be noted that the correctly coded correlation matrix (and like any other program), which is updated, will not induce any technical problems and will do its job for you to benefit from a currency strength meter.
Forex correlation matrix – the real currency strength meter
Forex correlation measures the relationship between any two assets over a specific period.
There are such notions as positive and negative correlations. A positive correlation between two currency pairs occurs when one currency pair repeats the movement of the other. And the more similar the price movements of these two pairs, the greater the correlation value between them. Conversely, a negative correlation occurs when the price changes for two currency pairs have the opposite direction. And the closer, on the contrary, one price moves in the opposite direction to the other, the stronger the negative correlation.
The maximum positive correlation is 1 or 100%, the maximum negative correlation is -1 or -100%. The minimum value of the positive and negative correlation (or rather its complete absence) is described by zero. Then, the closer the correlation value of 1 or -1, The greater the correlation between the currency pairs considered (the closer the straight line is to 1, and a -1 is the inverse correlation), and the closer it is to 0, the lower the correlation.
There are 3 undeniable advantages when using a Forex correlation in your trading strategy:
The correlation will help you determine the strength of the current dominant trend in the market and whether it is likely to continue in this direction.
Implementing a correlation matrix in terms of the Currency Strength Meter brings many benefits. Let’s take a look at some of them, so we will make sure that it is an essential indicator in every trader’s toolkit.
Short-term useful currency strength indicator
One of the advantages of the Forex Currency meter is that it can be used as an indicator of short-term movements. It can be really effective as a benchmark for determining which currencies show signs of improvement, making them valuable for the right time of trading decisions. By the way, it is a good way to check the signals provided by some other indicators with the help of a currency strength meter.
Coin strength meters are simple
Another crucial benefit of a force meter is its simplicity of Use and understanding of its signals. It should be a decisive point, that is, for novice traders as there is no need to read and interpret some complex data. You do not have to be a professional trader with ten years of experience to follow the simple and understandable graphical indication of the fall or rise of the currency.
Correlation matrices eliminate double exposure
As you know, currency pairs that have positive correlation move in an identical direction. Obviously, because of that, you should not place orders with currency pairs that show a high correlation, as it is actually the same order. If you still do, you put your account at risk as the market may start moving in the opposite direction. If you place sales orders with GBP/ USD, EUR / USD and AUD / USD, you run the risk of double exposure because these assets are deeply correlated.
With the help of a correlation matrix, it is easy to take a look at it to see the correlation of particular currencies. Be sure to check with him, just in case. This will help to dodge the opening of the same positions from the beginning, as well as double exposure to a weak currency.
Forex resistance gauges eliminate unintentional hedging
The next advantage of the resistance gauge is the elimination of unintentional coverage. For example, if you know in advance that there is a negative correlation between GBP / USD and USD / CAD, you are aware that these assets are leading in opposite directions. Consequently, in case there is a sell order on both, you will definitely lose money on one of them while making profits on the other. Simple as that.
Currency strength meters point to high-risk trades
Another good thing about the correlation between assets is that it can be used as some kind of risk meter, this is what it means. Let’s say we are placing a short position with GBP / CHF and GBP / JPY, and as we know, they are positively correlated. Then, from that, we can understand that placing the same order with correlated assets will only double the potential risk. Since the market can always move against the trader and two short positions is not something that professional traders will do.
How does the Forex Currency Strength Indicator work?
How does the Forex Currency Strength Indicator work?
So, before we move on to using a currency strength meter, let’s quickly go through the correlation matrix itself. Understanding the currency correlation matrix will allow you to avoid dangerous mistakes when making trading decisions. The importance of correlation in medium-and long-term trade is particularly high.
Basically, in the Matrix mentioned above you can see the following currency pairs:
EUR / USD-Euro vs US Dollar
GBP / USD-great Pound Sterling vs US Dollar
USD / CHF-US Dollar vs Swiss Franc
USD / JPY – US Dollar vs Japanese Yen
AUD / USD-Australian Dollar vs US Dollar
USD / CAD-US Dollar vs Canadian dollar
EUR / GBP-EUR to GBP-Euro vs Grand Pound Sterling
EUR / CHF-EUR to CHF-Euro vs Swiss Franc
EUR / JPY-Euro vs Japanese Yen
GBP / CHF: Grand Pound Sterling vs Swiss Franc
GBP / JPY-large Pound Sterling vs Japanese Yen
As we have already mentioned, a positive correlation is one where asset prices show the same direction of movement, and the negative is when assets move in the opposite direction.
Based on the table given above, you can see that there are three types of colors that show the different level of dependency strength between assets:
Target: little or no correlation (positive or negative);
Orange: mean correlation (positive or negative);
Red: strong correlation (positive or negative).
With the help of this correlation matrix, it will take you a few minutes to take a look at the table and see which currencies show a weak or strong correlation with each other.
The following explains how to interpret the data given in the correlation matrix:
White boxes: these include assets with little or no correlation. There are both negative and positive, and since this level of correlation has no influence on your trading positions, it is not necessary to pay attention to whether it is negative or positive. Let’s say it opens positions with EUR / CHF and GBP / CHF. Since the correlation here is only 0.24, it doesn’t matter what kind of correlation it is: the assets will move independently of each other.
Orange boxes: here you can see the currency pairs with the average correlation, up to 0.79 (positive or negative).
Red tables: these tables highlight currency pairs with a strong correlation of up to 100, either positive or negative. As for these, each trader should carefully check the strongly correlated assets in order not to spoil the trading account. So let’s say you want to open positions with GBP / USD and AUD / USD. After checking the correlation matrix, you will know that the correlation between them is extremely strong, reaching 0.91. Armed with this information you will know that it is better not to place the same orders with these two because of the increased risk. In addition, if you place the opposing orders with these financial instruments, the positions will cancel each other because they have a strong positive correlation. With the negative correlation, it’s the other way around.
Basically, traders can get a lot of information if they know how to interpret the Forex correlation matrix.
In the given table, you can see that USD shows its strength with the -0.95 correlation between USD / CHF and EUR / USD. From now on, if you open the same positions with these currency pairs simultaneously, they will cancel each other. On the other hand, placing the same orders will double the gain or risk, depending on the accuracy of the signal that made you place those orders. Speaking of the strength of the currency, the USD here is the strongest.
If you look at AUD / USD and EUR / USD, you will see that the correlation here is positive and is equal to 0.89. With that information in mind, you’ll know that placing the same orders here doubles the gain (or risk) as these currency pairs tend to move in the same direction. And, accordingly, if you open positions with different addresses, they will cancel each other.
However, the market does not want to please us with stability and is in a constant state of excitement. As a result, even the strongest correlations, which can last for months and years, sometimes change, and at the most inopportune moment. What is a correlation of this month may be a different story in a new month. So be sure to check everything before placing orders.
How to use the currency force meter
As you may have guessed, the logic behind the currency’s strength meter is crystal clear-buy a strong asset and sell the weak, simple as that. In cases where we say, EUR / GBP rises, but it is not clear whether it is happening because the EUR is strong or because the GBP is weak, is it? With the help of this indicator, you will be able to determine the reasons for that rally.
The green tables indicate the currencies that have decreased in value against the base currency;
The red tables show those that have increased in value against the base currency;
Gray boxes show minimal fluctuations.
The lighter the color, the lower the fluctuation against the other currency; and another shape around.
The coin strength meter is an excellent way to define which coins can be worthy to trade, as well as which ones should be avoided
For example, if one currency is very strong and the other suddenly weakens, it may be an opportunity to enter the market. This deviation indicates a strong momentum. And vice versa, if both currencies are weak or strong, points to the lateral trend, which means that it is better to pass this trade.
How to make the most of the real currency strength meter
Needless to say, currency correlation is not and cannot be used as the only way to analyze the chart and make trading decisions. Still, it can be implemented as a confirmation of some other signals and how to reduce trading risks. Follow these tips to make the most of the coin strength meter:
Do not place the same orders with negatively correlated currency pairs. As we mentioned above, in doing so, increases the risk and drastically reduces the potential profit, in addition to positions can cancel each other.
Reduce risks through diversification. If you open positions with positively correlated currency pairs (on condition that the signal is accurate), the gain will increase and the risk will decrease.
Coverage. If you have a losing trade, you can place the opposite order with the other currency that correlates negatively (it must be a strong correlation). Of course, the risk will not disappear, but in such a way, you can reduce it to a minimum, instead of losing all the trade.
Profitable trade is due to several different factors, including the strength of monetary instruments. The movement of prices in the market is based on an imbalance of these forces. Today we have considered one of the “non-standard” but very informative indicators. Knowing which of the selected coins is stronger can be a great clue for a trader. Although considered a “veteran”, it still helps a lot to those who know how to use it and Exchange several monetary instruments at once. With it, you can easily determine the direction of the trend and activity of currencies to understand which currency is most profitable for you to trade today.