The currency strength meter is a technical indicator that measures the relative strength of major currencies compared to each other over a specified time period. It is an invaluable tool for forex traders to gauge real-time movements between currencies and identify high-probability trading opportunities.
This guide covers everything you need to know about using the currency strength meter effectively in your analysis and trading.
What is the Currency Strength Meter?
The currency strength meter is a visual indicator that plots the relative strength of major currencies for a chosen timeframe into an easy-to-read column chart.
It ranks the performance of currencies from strongest to weakest – the stronger the currency, the longer its column on the indicator window. As price action causes rankings to change, the columns dynamically adjust their length accordingly.
This allows traders to instantly visualize the recent strength or weakness of currencies rather than analyzing individual charts. The currency strength meter simplifies the process of determining which currencies to buy or sell.
How Does the Currency Strength Meter Work?
The currency strength meter calculates a strength score for each currency over the analyzed time period based on its price performance.
The calculation methods can vary, but typically involve a formula factoring in elements such as:
- Percentage gain or loss in pips
- Volatility and trading range
- Momentum measured by RSI or stochastic indicators
The higher the strength score, the better the currency has performed relative to the others. Scores are then ranked in descending order and plotted as columns – strongest currencies have the longest green bars, weakest have the shortest red bars.
As price fluctuates, the scores and columns change in real-time, giving traders an evolving bird’s eye view of currency strength dynamics.
Trading Signals with the Currency Meter
The currency strength meter produces clear trading signals for forex pairs:
- Buy and go long on the currency that is displaying greatest relative strength.
- Sell and go short on the currency showing the most weakness relative to others.
- If a currency has a strong upward trend, look for long entries in pairs involving this currency.
- If a currency has a strong downward trend, look for short setups in related pairs.
- When multiple currencies are oscillating up and down with no clear direction, avoid trades until strength establishes.
Optimizing Settings for the Indicator
Traders can refine the currency meter’s default parameters to suit their trading style:
Timeframe – 14-50 periods is ideal to assess recent to medium-term strength. Lower values give more recent view.
Smoothing – Adjust smoothing to balance sensitivity and smoothness. Higher values stabilize readings.
Currencies – Option to add or remove certain currencies to focus analysis.
Strength Calculation – Test different computation methods like momentum or volatility scoring.
Colors – Have strongest currencies plotted in green, weakest in red for clear visual ranking.
How to Use the Currency Meter Effectively
Here are some tips for effectively incorporating the currency strength meter in your trading:
- Analyze longer timeframes like daily or 4-hour to gauge reliable directional bias.
- Look for sustained strength or weakness – avoid trading short-term spikes.
- Combine readings with overbought/oversold oscillators to time entries.
- Use the meter to confirm trades based on other technical or fundamental signals.
- Be cautious trading when multiple currencies are oscillating with no clear strength.
- Focus on pairs involving the extreme strength or weakness currencies for best odds.
- Incorporate risk management strategies according to the strength-weakness differentials.
Benefits of Using the Currency Strength Meter
Here are some of the main advantages of using the currency strength meter:
- Quickly identifies which currencies are outperforming or underperforming
- Visual display simplifies analysis compared to checking individual charts
- Confirms high probability setups in direction of relative currency strength
- Saves time analyzing charts to find strongest and weakest currencies
- Helps traders isolate the best currency pairs to focus on
- Easily customizable to your personal trading requirements
- Can be combined with other forex indicators or strategies
- Suitable for all experience levels from beginners to advanced traders
Limitations and Risks to Keep in Mind
However, there are some limitations to using the currency strength meter:
- Does not work well for illiquid, exotic currency pairs
- May generate false signals or whipsaws during market consolidations
- Requires combining with other confirmation indicators for best results
- Limited view comparing only chosen major currencies
- Does not incorporate other technical or fundamental factors
- traders still need risk management strategies for discipline
The currency strength meter is an invaluable visualization tool providing an instant snapshot of which currencies are outperforming. When integrated properly within a structured trading plan, it allows traders to boost profits by trading in the direction of currency strength trends and momentum. However, traders should combine it with other technical and fundamental confirmation before entering trades. Used prudently, it is an excellent addition to any forex trading system.