The Forex Strength Indicator is the secret weapon of successful trading. Through this trading guide, our team of industry experts will reveal our proprietary currency strength indicator package. You will learn why our internal indicator is better, along with an unorthodox trading strategy for currency strength.
Looking at a chart to determine which currency is strong and which currency is weak can be quite confusing.
If you participate in the intraday noise or the multi-time frame analysis, things can get even more confusing. When you throw into the mix the performance of the same currency against a basket of other currencies, you realize that determining the strength of currencies is not such an easy job.
It may be the case that the EUR is the strongest currency against the US dollar on the 15-minute chart. However, if you analyze the same currency pair on the 1-hour and 4-hour charts, you have a new revelation.
The new inputs may show you a different story and the EUR/USD may be in a serious trend.
In the forex market, this type of conflict analysis happens all the time.
Conflicting signals on different time frames and across different currencies are the norm.
When the forex charts cannot make clear the strength of a currency, that is where a currency strength indicator comes into play.
Let’s lay the groundwork first before revealing our strategy for currency strength.
What is the Currency Strength Indicator?
As the name suggests, the currency strength indicator is an MT4 benchmark indicator designed to reveal the strength of a particular currency pair against other peers. At the same time, the relationship between the currency pairs is organized according to their strength or weakness.
The Currency Strength Indicator MT4 will help you make sense of conflicting market trends.
However, not all currency strength indicators are created equal.
Some may be based on the rate of change ROC, or the RSI, or the CCI or some sort of intermarket correlation.
So, the formula to calculate the strength of a currency meter.
If the formula for currency strength is wrong, the entire strength readings will be misleading.
Our team of industry experts uses more than the price change over a given period to calculate the strength of the currency. We use a proprietary trading formula that aggregates prices from multiple timeframes and applies our own weights to deliver the most effective currency strength indicator.
Our proprietary formula to calculate the currency strength works better than all the other free currency strength indicators put together.
We are going to demonstrate how this is possible by revealing how one of our team members trades with the currency strength meter.
The question now is…
How to use the Currency Strength Indicator to:
- Determine which currency pair is the strongest / weakest
- What is the most efficient method of combining the values of currency strength
- How to time the market
Here’s how…
How to use currency strength meter
There are basically two standard ways to use the currency strength tool:
- As a next tool
- As a trend reversal tool
Let me explain…
When using the currency strength meter, we analyze each currency separately as currency pairs. The whole idea is to identify the strongest currency and the weakest currency so that you can choose the right currency pair to trade.
Clearly, the basic idea behind the currency strength strategy is to buy strength and sell weakness.
In other words:
- Buy the strongest currency against the weakest currency
- Or sell the weakest currency against the strongest currency
See the currency heatmap indicator below:
For example, the strongest currency pair at the moment is JPY, and EUR is the weakest.
The biggest potential deal is to sell EUR/JPY.
It is nothing more than a form of trading in the direction of the trend. Or, trade with the prevailing momentum.
Additionally, forex traders can wait until one currency shows an extremely strong reading and another currency shows an extremely weak weak reading and attempt to trade a reversal.
The second trading approach is riskier, as currencies do not have a real intrinsic value.
Here’s the thing…
The risk is that the currency will continue to get stronger and stronger (weaker and weaker) and you will remain in a bad trade.
If you manage to keep our in-house currency strength indicator package going, you get a 3 in 1 indicator.
See below all three indicators in action:
Our currency heatmap (part of the 3-in-1 currency indicator) can help you determine when a currency is losing its strength and a reversal is coming.
Trade Strategy for Currency Strength
Our currency strength strategy can make you a better trader.
You can either use it as a standalone trading strategy or simply use it as a confirmation tool.
The question now is…
How can you identify strong and weak currencies in forex?
We like to rely on our complex mathematical formula behind the Currency Strength indicator package to measure the strength and weakness of a currency.
We use the currency strength indicator to pair the strongest currency with the weakest currency, so you can take advantage of the momentum from both sides.
For example, according to our currency hit chart indicator, at the moment GBP is the strongest currency and CAD is the weakest.
See the currency heatmap below:
If we combine the two currencies, we end up with the GBP / CAD pair.
Check forex chart below:
As you can see buying GBP/CAD would be a big mistake.
Why?
To be honest, buying here is like chasing the market after a big rally.
As you can see, the currency strength indicator is meaningless if you don’t know how to use it properly.
Well, that’s what we’re going to reveal next, so stay tuned…
Here’s a quick overview of the three main features for more information on our proprietary currency strength indicator:
- Currency Strength Indicator – this indicator places itself in a separate panel and shows a diagram of strengths for each currency for the current time frame. It can show you how the historical changes in the currency strength and what strength they currently have.
- Currency Heatmap Indicator – is very useful to see the market condition globally. It shows all possible relationships between pairs, arrange and color according to their strength or weakness.
- Currency Strength Color Chart – gives you a complete picture of the market in a compact view. Compared to the other 2 indicators, this one works with all TFs and shows the summarized result information by painting currencies in different colors. It also provides a final recommendation for each currency, using all timeframes to make assessments.
Now, what’s next?
Obviously, we’re going to show you how to combine all three main functions and trade like a pro.
Right now we are going to show three different trading strategies that you can follow to properly read the strength and weakness of the major currencies.
Note * Our proprietary indicator is so versatile that it can be used in more than one approach.
Strategy 1: How to use the Currency Strength Indicator
We’d like to kick things off with the currency strength chart below.
Here is how we want to use our diagram…
In general, we want the currency strength to push a new histogram bar with a different color above and below the zero line and at the same time or within a maximum of 2-3 histogram bars.
No better way to explain this than to show you directly on the histogram for currency strength.
See below:
Note * each color is associated with a specific currency.
The technical readings of the GBP/AUD chart also confirmed that buying the currency pair is a good trade.
Check out the chart below:
According to our current exchange rate measurements, we can distinguish the following:
- The NZD (turquoise) is the strongest currency
- And EUR (light blue) is the weakest currency
However, there is a problem; we can see that this breaks the first rule of trade.
The strength histogram does not print NZD strength and EUR weakness at the same time or at least within the first 3 histogram bars. The NZD strength only appears after the EUR has already pushed 6 histogram bars of weakness.
Here is the lesson you need to learn…
The currency strength indicator can only help you if you know how to read it correctly.
Next…
Strategy #2: How to Trade with the Currency Strength Heatmap
We like to trade using the currency strength heatmap to head off the short-term burst of momentum.
The heat map can be used as a good barometer to measure the short-term strength and weakness of currencies.
And here’s how we use it…
According to the current heatmap readings, NZD is the strongest currency against all other major currencies and CHF is the weakest currency.
As a result, we connect the two currencies and end up with NZD / CHF, which has a possible buying opportunity.
After a few hours of trading activity, the result of the trade is:
The strongest currency continued to strengthen and the weakest currency continued to weaken.
Strategy 3: How to Trade with the Currency Strength Matrix
The currency strength matrix is based on the price action and the correlation between exchange rates.
Compared to the other two strategies, the currency matrix will give us a more detailed view of the strength of the currency on various time frames.
The matrix will also reveal the average strength across all timeframes.
This gives us a brief overview of the general strength and weakness of the currency.
On the forex chart below, we can see what our currency strength matrix looks like at the moment:
If we look more closely, we can see that despite the CHF being the strongest currency, on the intraday timeframes we can see a different story.
This is how it works …
If all the timeframes converge and point in the same direction, we know we have a strong reading of the strength and weakness of the currency.
Let me explain…
If we study the currency matrix again, we can note that the USD shows a constant reading across all its time frames.
The various shades of green on all USD timeframes show real strength. At the same time, the EUR is showing different shades of red across all timeframes, meaning it is the weakest currency.
This is what it looks like on the chart.
See below:
Final words – the best currency strength meter
The Forex Strength Indicator can be very attractive especially for beginner traders who are still learning how to trade. This is the best currency strength meter you will ever find to give you an accurate reading of currency strength, and we use 56 charts simultaneously in our proprietary formula.
Here is a secret that all forex traders should know. Instead of trading currency pairs, try trading individual currencies as a whole. To accomplish this, you need to determine the strongest and weakest currencies to trade. And here is where our own currency strength indicator package comes into play.