Since currencies in the Forex market trade as pairs in opposition to each other, imagine if you were able to know what currencies are strong during a certain time and what currencies are weak during that same timeframe. Well, with the Forex currency strength meter indicator, you can do this.This tool enables you to make many useful insights that can be used to make profitable trades.
What is a Currency Strength Meter?
Put simply, a currency strength meter is a visual representation that shows what currencies are strong and what currencies are weak. Since currencies trade on the Forex market as pairs, you are buying one and selling another. Therefore, it is difficult to gain any insight from looking at a Forex pair currency in isolation. This is why currency strength meters exist, to give a visual representation of the relative value of currencies in relation to other currencies. The way a currency strength meter works is that it takes the relative strength of a currency with all the other currencies considered and produces a single value. Sometimes the algorithm or formula behind the currency meter will make the calculation of value using different weights to balance the significance of different currencies in relation to each other.
How to Read a Currency Strength Meter?
This depends a great deal on what currency strength meter you are using. Some of these indicators present the information in terms of a heatmap, while others show the currency strength in the form of a line graph. Still others only display line graphs of currency pairs and leave you to figure out what this means for any given isolated currency. Other currency strength meters are correlation matrices, showing you the exact correlation between each pair.
Why Use the Currency Strength Meter?
The currency strength meter can tip you off to several trading situations you should be aware of, such as the strength and weakness of a currency in relation to other currencies. Take for example that the USD (U.S. dollar) is the most powerful currency of the past 24 hours. Say, AUD (Australian dollar) is the weakest. That would logically mean the U.S. dollar (USD) has risen a great deal against the Australian dollar (AUD) in the past 24 hours. If you take a look at the chart of the AUD/USD pair, you would see that it is in a downtrend. This is because AUD is the quote currency of the pair (with USD being the base currency) and the price and the chart represent the price of AUD in relation to the USD. Since the AUD is weakening as compared to the USD, the chart is naturally trending downward.
You could easily see that a currency pair is trending downward just by looking at a chart of it. But looking at the currency strength index is sort of like looking at the standings, or fixtures of a sports league. It’s easy to see who is ahead in a game, but by looking at the standings you can tell who is really good and who is really bad. So, it’s easy to pick out imbalances and ways you can take advantage of them in the market.
Simplification of Complex Interactions
Currency strength meters can compress a lot of information into a very efficient graphical representation. You can easily glance at a currency strength master as a sanity check to confirm if your trade makes sense given the relative strengths of the two respective currencies over the time period in question. The currency strength meter takes a lot of information and makes it very accessible to even an average trader.
Forex strength meters can tell you with just a glance that two currencies are correlated, which would make trading one against the other a bad move because they will either increase or decrease together, yielding no profit. Two pairs that are both very strong, but close together, may be good for range trading. If two currencies are pushing in vastly different directions, i.e., one is very strong and another is very weak—the currency pair involving these currencies is worthy of a closer look to see if this trend will continue or whether it is possibly primed for a reversal.
Different currency strength meters display information in different ways. Some simply display it in a line graph format, while others lay out the data as a heatmap. This heatmap style of currency strength meter usually shows the strength of each currency on a standard scale ranging from -10 to +10.
What are Common Issues with Currency Strength Meters?
Typical issues that can arise with currency strength meters range from performance issues to using them in an ineffective way. Sometimes these issues are not the result of the indicator itself but can be due to a poorly performing device or one that has fewer resources than average.
Performance Issues Freezing and Hanging
Since currency strength meters involve several currencies, it can be a heavy load on an interface when it comes to fetching the information over the network, which could entail significant delays.
Some currency strength meter software can have memory leaks, which cause the software or interface to allocate memory and not give it back to the system. This leads to a lot of memory getting wasted, which could slow down your system.