How To Use the Currency Strength Meter
Something you should never forget as a forex trader is how to use the currency strength meter. There are many currency pairs on the forex market, and it can be pretty tricky to choose an option to trade. Thankfully, a currency strength meter can help you with that.
With the help of a currency strength meter, you won’t struggle to select a currency pair to trade in the forex market. The tool can help you identify the weakest and strongest currencies. So, you will be able to pick the right currency pair with promising returns.
This guide explores the basics of the currency exchange meter, including what it is and how it works. Most importantly, you will know how to use the tool to your advantage.
That said, let’s dive right into the facts!
What is a Currency Strength Meter (CSM)?
If you are a forex trader, you’ve probably heard about the currency strength meter, but you’ve never tried using it.
So, what’s the currency strength meter?
Well, a currency strength meter is a tool or indicator that measures the strength of each currency. It allows you to analyze how a currency performs in the forex market at a glance. However, the CSM analyzes each currency separately, not currency pairs.
As an algorithm-based indicator, the CSM uses the exchange rates of different pairs to measure every currency’s strength. However, it is relatively more complicated than the Awesome Oscillator, MACD tool, and the Standard RSI Indicator.
Notably, there are many versions of currency strength meters on the internet. That’s the reason you should try out several options to find what works best for you. Also, consider reading the reviews for the currency strength meter you plan to use.
During the search, it’s worth comparing the features of several versions. For example, advanced options offer their weightings and trading alerts while simpler versions don’t. Also, you can customize the meter to integrate well with the trading platform you use.
Whether you choose an advanced currency strength meter or a simpler version, the bottom line is that they perform the same role: analyzing a currency’s strength.
For example, if you want to determine the strength of the Canadian dollar (CAD), the tool analyzes the strength of currency pairs with CAD and gets its overall strength. Such pairs can be USD/CAD, EUR/CAD, and GBP/CAD.
How a Currency Strength Indicator Looks Like
Although there are many versions of currency strength meters, the most common has lines moving around the zero levels. Usually, these lines have different colours and can be rough or smooth, depending on the parameters and algorithms used.
Another version of the currency strength meter is the correlation matrix, which highlights the strength of a currency on various timeframes. These versions give more detailed and accurate information than the currency strength meter that uses coloured lines.
How to Use a Currency Strength Meter
The main idea behind using the currency strength meter in the forex market is identifying weak and strong currencies. It analyzes different currency pairs linked to a particular currency to measure its strength or weakness.
In a nutshell, here are the steps any currency strength indicator follows.
- The currency strength indicator identifies the base currency
- It then pairs the currency with other currencies available for analysis
- Next, the indicator measures the strength of each paired currency
- Finally, the currency exchange meter calculates the average score
So, how can you read and interpret the currency exchange meter?
As mentioned earlier, there are several versions of the currency exchange meter, and each has a unique measuring system. However, the line currency strength indicator has a measuring system with a 0-10 range. It’s the most common currency exchange meter.
The line currency strength indicator uses lines that depict currencies, and here are the rules that apply to all currency strength meters that use the line versions.
- The currency gains momentum if the line goes up
- A currency weakens if the line moves downwards
- A higher line indicates a stronger currency
One thing you’ll discover is that the lines in the currency exchange meter have different colours. The colours are not meant to decorate the indicators but instead have a meaning.
For example, green can signify little to no correlation while blue for weak correlation. Also, you can use red to show high correlation and orange to mean medium correlation. The colours may also apply to currency exchange meters that use a correlation matrix.
The currency strength meter comes with several benefits, which is why many forex traders use the tool worldwide. Here are some of its advantages.
Defines a Trade Direction
Even though the currency exchange meter doesn’t give 100 percent accurate signals, it can help to define a trade’s direction. It can offer an overview of several currencies.
Free Versions are Available
When you perform a quick search on the internet, you’ll find many versions of currency exchange meters, including free options. So, take full advantage of the free versions.
The indicator helps forex traders spend little time on fundamental analysis. However, that doesn’t mean the traders should stop verifying the data.
Provides Alerts on High-Risk Trades
The currency strength meter can protect forex traders from double risks, like opening the same trade for negatively correlated pairs. Thus, it ensures the risks are minimal.
Helps to Filter Currency Correlations
A currency strength indicator shows whether a currency is weak or strong. So, it can help you define currencies that have positive or negative correlations when trading multiple pairs. Don’t open the same trades for currencies moving in opposite directions.
Mistakes to Avoid When Using the Currency Strength Meter
If you don’t understand how to use the currency strength meter, you may end up making costly and irreversible mistakes. Thankfully, we’ll show you some of the mistakes you have to avoid at all costs when applying the currency strength meter.
Here are things to avoid.
- Using the currency strength meter randomly without understanding how it works
- Blindly trading by using the currency strength meter to determine your entry time
- Using a lower timeframe on the currency strength meter prone to false signals
Creating a Currency Strength Meter that Can Work Effectively
Although all currency strength meters work similarly, you can create one that works well without coding. The bottom line is to determine the change in price within a specific period then figure out the strongest and weakest currency pairs.
You don’t need complicated formulas and complex algorithms to create this currency strength meter. So, here is how it can work for you.
- Create a list with major currency pairs
- Determine the percentage change for the last 15 weeks
- Rank the currencies from the strongest to the weakest currency
So far, you now know how to use the currency strength meter to identify strong and weak currencies. That can help you select the most promising currency pair to trade in the forex market. However, the currency strength meter doesn’t specify when to enter a trade. Instead, it puts the odds in your favour by pointing to stronger currencies.