Today, one of the struggles of a Forex trader is you have got many currency pairs to select from.
You are bullish on EURO, but you choose to trade: EURUSD, EURCAD, EURNZD, EURAUD, EURGBP, EURJPY, etc.
So which currency pair do you trade?
Well, that is where a currency strength meter comes into play.
It helps you recognize probably the strongest/weakest currencies, so you can pick the right currency pair to trade (more on this later).
But first, I want you to stay away from these common mistakes traders make when using the currency strength meter…
Do you make these mistakes when using a currency strength meter indicator?
In case you google “currency strength meter,” it returns 8.3 million results – crazy.
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And also, you know what is crazier?
Nearly none of them tells you the pitfall to stay away from when making use of a currency strength meter.
That is why traders lose money even with a “GPS” in the hands.
Thus, allow me to share the mistakes to stay away from using a currency strength meter (the stuff nobody tells you) …
You randomly use a currency strength meter without knowing exactly how it works. Now, a currency strength meter is actually like any other trading indicator.
There is a formula behind it to determine the strength/weakness of a currency.
But if you do not understand the formula behind it, how are you able to trust the outcome of the currency strength meter?
What when the system is wrong?
What if the currency strength meter only works daily, but you are unaware of it and use it on the lower timeframe?
That is the reason no matter what indicators or tools you use, you always have to understand the formula behind it and just how it works.
You use the currency strength meter to time the entries of yours. Now, a mistake many traders make is actually to trade based on the currency strength meter blindly.
You determine what is probably the strongest currency pair right now and immediately buy, thinking the price will move higher – big mistake.
Here is why…
A currency strength meter is not meant to generate buy/sell signals.
It simply tells you which are probably the strongest/weakest currencies at a point on time.
The lower timeframe is actually prone to false signals
Here is the thing:
Most currency strength meters calculate the change in price (over a fixed period) to determine which currencies are actually weak or strong.
But this’s prone to false signals on the lower timeframe.
Because high impact news can cause a “spike” in the price, which misleads the strength/weakness of a currency pair.
That is exactly why you wish to use a currency strength meter that calculates the change in price from the higher timeframe.
And here is how you do it…
The best way to produce a currency strength meter that works (and without coding) is to work similarly.
The concept is usually to calculate the change in cost over a specified period and then determine which are actually probably the strongest/weakest currency pairs.
Naturally, you can complicate things by adding formulas, weights to different timeframes, etc. – and it will not make a lot of a difference (besides confusing yourself).
Thus, there are no complicated formulas for this particular currency strength meter or perhaps any complex algorithm.
Here is just how it works…
Make a list of major currency pairs.
Calculate the percentage change over the last 15 weeks (for the major currency pairs)
Rank them from strongest to weakest
Allow me to explain…
#1. Make a list of major currency pairs
The list includes EUR/USD, CADUSD, JPYUSD, NZD/USD, AUD/USD, GBP/USD, CHF USD.
Now you are most likely wondering:
“Why do you use JPYUSD rather than USDJPY?”
It would help if you standardized USD as your quote currency, so you can compare them “apple for apple.”
#2: Calculate the percentage change over the last 15-weeks
Here is how…
Insert the Rate of Change (ROC) indicator onto the weekly timeframe
Change the settings to 15-period
Please do it for all major currency pairs
#3 Rank them from strongest to weakest
After you have got the values, you want to rank them from probably the strongest to probably the weakest.
The currency pair with probably the highest value would rank at the top, followed by the second, fourth, third, etc.
The way to tweak the currency strength meter for your very own trading strategy Now, by using the weekly prices to determine weakness and strength, you can stay away from false signals from the lower timeframe.
But in case you are a short-term trader, using a 15 week ROC as your currency strength meter is way too long.
So, what now?
That is exactly where you can tweak your currency strength meter for short-term trading.
Thus, allow me to share several guidelines for you:
In case you trade below the 4-hour timeframe, use 4 weeks ROC
In case you trade between the weekly and 4-hour timeframe, use 15 weeks ROC
In case you trade above the weekly timeframe, use 30 weeks ROC
And so here is what you have learned today:
A currency strength meter calculates the % change in price to rank currency pairs from strong to weak.
A currency strength meter does not tell you when to enter a trade; it helps you filter for potential currency pairs to trade.
You can tweak your currency strength meter to adapt to different trading timeframes.
If you need to trade strong trending markets, pick a strong currency against a weak one
If you would like to capture swings in the market, pick currencies of similar strength or perhaps a weakness