What Is a Currency Strength Meter, and How to Use It?
What Is a Currency Strength Meter, and How to Use It?
12:09 19 July 2021
With an average daily trading volume reaching trillions, the Forex market is the world's largest, busiest, and most liquid market. One component of the Forex market that distinguishes it from other financial instrument markets is the concept of currency pairings. When you acquire a Forex position, you gain exposure to two different currencies. This presents numerous interesting opportunities, including the ability to gauge one currency's strength against another.
However, It does make it tough to measure the performance of a currency in itself. Take, for example, the USD/GBP currency pair. Is it because the USD is doing well or because the GBP is doing poorly that it has gained so much on the day?
To understand this, the Currency Strength Meter comes into play.
What Is a Currency Strength Meter?
The Currency Strength Meter is a measure or indicator of a currency's strength or weakness in the Forex market. All major currencies' relative strength can be seen by using this meter.
This meter shows real-time market information and can determine which currency is undervalued or overvalued. Using this tool, Traders can utilize currency strength to predict currency changes while making judgments for the greatest trading chances.
It's most commonly used on MetaTrader 4, MetaTrader 5, or any other platform that supports custom indicators.
How Does the Currency Strength Meter Work?
By following these four procedures, the Currency Strength Meter achieves the desired results:
- First, it identifies and analyses the base currency.
- The meter then combines the currency in question with the rest of the world's currencies.
- The meter then calculates one currency's strength in relation to the other.
- And in the final step, it determines the average score.
Basically, it analyses data from all currency pairs during the previous 24 hours and does calculations on each. For example: USD/EUR, GBP/EUR, USD/AUD etc.
How to Use the Currency Strength Meter?
A Currency Strength Meter can help you figure out which currency pairs are excellent for trading. Traders can achieve that by doing the following:
- On the currency strength meter, check for the weakest currency or a currency that has abruptly gotten weak recently.
- Search the strongest currency and examine the pair made up of the strong currency and the one that has suddenly become weak.
- Examine the data for it to see whether a trade can be executed here.
Hence, Currency Strength Meter aids in the purchasing of the strongest currency against the weakest currency, as well as the selling of the weakest currency against the strongest to gain momentum from both ends.
For example, if you see a high-performing EUR on the Currency Strength Meter, you might note that the United States dollar (USD) has suddenly gone weak today. To profit from the EUR's strength and the USD's weakness, you might buy EUR/USD.
Currency Strength Meter also helps determine what caused a currency pair to change or move from the previous day. For example, let’s imagine that the USD/GBP exchange rate is fluctuating. The Currency Strength Meter will assist in determining if the GBP is gaining stronger or the USD is becoming weaker. This is critical in Forex trading.
Benefits of Using the Currency Strength Meter
There are four important perks that we want to highlight.
Easy to Use
The ease with which a Currency Strength Meter can be understood as one of its main advantages. This is especially appealing to beginning traders because you don't need to be an expert in the Forex market to determine which currencies are performing well or poorly by simply looking at a basic graphical representation.
Effective Short-Term Indicator
Currency Strength Meters are commonly used by professional traders as short-term indicators. They're handy as a quick reference to which currencies are on the rising trend, but they're more of a depiction of present strength than anything else, so they're best used for trading choices that need to be made instantly or to double-check information from other indicators.
Preventing Unwanted Hedging
A trader can avoid potential hedging if the correlation strength between different pairs is understood ahead of time. If there is a negative connection between JPY/EUR and USD/GBP, for example, you can determine that these currencies are moving in opposite directions. As a result, if you opened long trades on both, you'd probably win one and lose the other. As a result, knowing this ahead of time is beneficial.
Identifying Trades That Have a High Level of Risk
The behavior of different currency pairs varies. As a result, enhancing your exposure to a currency pair through correlation can increase your risk. You can avoid this by using the Currency Strength Meter and focusing solely on the most trending currency pairs.
Currency Strength Meters are a great way to determine which currencies are performing well or poorly across the board. Simply attempting to articulate such strength or weakness can alert you to basic changes that you might otherwise overlook. Currency strength indicators assist you in identifying markets with real imbalances that you can potentially profit from.
When used in conjunction with other indicators, Currency Strength Meters are more effective and accurate, thereby providing a holistic analysis.