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. A currency’s strength is determined by the interaction of a variety of local and international factors such as the demand and supply in the foreign exchange markets; the interest rates of the central bank; the inflation and growth in the domestic economy; and the country’s balance of trade.
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
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.
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
Understanding the relative strength of currencies is a way to understand which pairs are bullish or bearish, confirm the pairs you want to trade, and the best time to trade a pair. In forex trading, currency strength is one of the main determinants of the value of currency pairs and can be used by short-term traders to develop news trading strategies.
Free currency strength meter downloads are always risky, and you should be careful with them. Although the indicator doesn’t provide 100% accurate signals, it’s useful when identifying a trade’s direction.
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 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 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. Understanding the relative strength of currencies is a way to understand which pairs are bullish or bearish, confirm the pairs you want to trade, and the best time to trade a pair.
This currency strength indicator tries to show you the absolute strength of major currencies. The indicator uses a unique algorithm to detect rapid price changes. Currency strength expresses the value of currency. For economists, it is often calculated as purchasing power, while for financial traders, it can be described as an indicator, reflecting many factors related to the currency; for example, fundamental data, overall economic performance (stability) or interest rates.
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