What Is The Relative Currency Strength Indicator & How To Trade With It

The Relative Currency Strength indicator tries to find the strength and weakness of individual currencies and currency pairs. The findings can then be used to help decide which currency pairs to trade and in which direction. The indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

What is the Relative Currency Strength indicator?

As the name implies, the Currency Strength indicator is a unique forex indicator, which indicates the strength of a given currency over other currencies. At the same time, the relationship between currency pairs is organized according to their strength or weakness.

The currency strength indicator helps to understand the conflicting market trends. You can use this indicator to estimate when the currency is in trend and when it can reverse the trend.

However, not all currency strength indicators are created equal. Some may be based on the rate of change (ROC) or RSI or CCI or some correlation between markets.

So, the formula for calculating the currency strength should be well tested. If the currency formula is incorrect, the general strength values ​​are misleading.

Hence, the relative currency strength indicator uses an exclusive trading formula that aggregates prices over time, and it weights to create the most effective indicator of currency strength.

You can Use the Currency Strength indicator for:

  • Finding which currency pair is the strongest / weakest
  • The most effective way to combine currency values
Relative Currency Strength indicator on chart
Relative Currency Strength indicator on chart

How to use the Relative Currency Strength indicator?

There are two main methods of using a currency strengthening tool:

  • As a trend tool
  • As a trend reversal tool

Let’s explain it further…..

When using the currency strength indicator, we analyze each currency separately and not the currency pairs. The idea is to determine the strongest currency and the weakest currency so that you can choose the right currency pair for trading.

The main idea of ​​a currency strength indicator is to buy a currency at strength and sell at weakness. In other words:

  • Buy the strongest currency against the weakest currency
  • Or sell the weakest currency against the strongest currency

For example, the strongest currency is the Canadian Dollar, and the Japanese Yen is the weakest one. The biggest potential may be to buy the CAD/JPY pair.

Using the Currency Strength Indicator
Using the Currency Strength Indicator

Another way to use this indicator is to find the reversal of trend. Forex traders can wait until one currency shows an extremely strong value, while the other currency is extremely weak and attempt to trade with a reversal. Like the above chart shows CAD at extreme upside while JPY on the extreme downside. Therefore, the traders may look for selling opportunity in the same pair as well.

The reversal trading approach is riskier because currencies have no real intrinsic value.

This is a problem …

There is a risk that the currency will continue to strengthen (or getting weaker and weaker), and you will be stuck in a bad trade.

Relative Currency Strength Indicator trading strategy

You may use the indicator as a confirmation tool for trading or you can use it as a standalone trading strategy.

Relative Currency Strength Indicator buy strategy

  • The value of base currency should be 60 or above.
  • The value of denominator currency should be below 40.
  • Wait for the candle to close as bullish.
  • Mark the swing area and place stop-loss around the recent low.
  • Keep the take-profit twice the size of your stop-loss for a favourable risk to reward ratio.
Relative Currency Strength buy trading signal
Relative Currency Strength buy trading signal

Relative Currency Strength Indicator sell strategy

  • The value of base currency should be 40 or below.
  • The value of denominator currency should be above 60.
  • Wait for the candle to close as bearish.
  • Mark the swing area and place stop-loss around the recent high.
  • Keep the take-profit twice the size of your stop-loss for a favourable risk to reward ratio.
Relative Currency Strength sell trading signal
Relative Currency Strength sell trading signal

Relative Currency Strength Conclusion

Relative Currency Strength indicator tries to find the strength and weakness of individual currencies and currency pairs. The findings can then be used to decide which currency pairs to trade an in which direction.

I would prefer to use the majority of technical indicators such as the Relative Currency Strength indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Relative Currency Strength indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Relative Currency Strength indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Relative Currency Strength indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!