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Understanding Currency Strength Meter

Tue Oct 26 2021 14:36
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According to the text, traders use the currency strength meter to identify and rank currencies from the strongest to the weakest. In addition to that, the text indicates that traders analyze and use different indicators to make a decision. 

Why measure the strength of a currency?

Forex trading is the exchange of one currency for another currency. Currency traders measure the strength of currencies to know which currencies they should pair up when making an entry. 

This article discusses the currency strength meter indicator that traders use to measure from the strongest to the weakest. The text also states the types of analysis and trading tools a trader needs when making an investment decision. 

The article lists the whole process that a trader follows when ranking a specific list of currencies. It also indicates the other uses of the CSM besides measuring the strength of currencies. 

Above that, the article also lists the common mistakes that individuals make when using the CSM indicator. If an individual does any of the listed mistakes in the article below, the trader will incur huge losses because they have obtained wrong results. 

What is currency strength? 

Currency strength is the value of one currency in terms of another currency. It can also be explained as the purchasing power of a currency.

If a country’s currency is said to be strong, it will result in the countries exports being expensive that will, in turn, result in the disequilibrium of a balance of payments

On the other hand, if a country’s currency is weak, the countries exports will be cheap while the imports will be expensive thus increasing the cash inflow into the country. 

How to measure currency strength 

Forex traders depend heavily on trading indicators and signals to make decisions that will result in a profit. For them to even begin trading, they first use the currency strength meter to determine the strongest and weakest currencies. 

To determine the strength of each currency using the strength meter, traders usually follow the following procedure: 
  • Identify the main currencies to be analyzed 
  • Identify the base currency to be used for comparison 
  • Pair up the main currencies selected with the chosen base currency. 
  • Measure the rate of price change of the currency pairs over a long-time frame. 
  • Rank the currencies from the strongest to the weakest. 

Currency strength meter (CSM) readings interpretation 

The relative currency strength readings that the currency strength meter will display will range from 0-10. The closer the value is to 10, the stronger the currency. The closer the value is to 0, the weaker the currency. 

Adjust the timeframe in a currency strength meter to suit your strategy. 

CSM readings are more accurate when a trader uses a longer timeframe. It does away with the false forex signals associated with the short timeframe.

However, there is an investor who trades in the short term. According to tradingwithrayner.com
  • If you are trading for a short period like 4 hours you can adjust your CSM to four weeks rate of change. 
  • If you are trading for a period ranging between 4 hours and a week timeframe you can adjust your CSM to 15 weeks rate of change. 
  • If your trading period is above a week you can adjust your CSM to 30 weeks rate of change. 

Using the CSM to pair the best currencies for massive trends 

As stated before, the CSM enables traders to rank currencies from the strongest to the weakest. 

To ride huge trends, you need to pair up the strongest and the weakest currencies as identified by your CSM measurement. The result is a steady downtrend. 

Using CSM to pair up currencies for swing trading 

Swing trading is when investors trade a currency when it is weak to capture the swing once the currency starts to gain. Having already run your CSM measurement, you pair up the currencies that have similar strengths. 

Mistakes to be avoided when using CSM 

Most beginner investors make mistakes the first time they are trading. Some of the mistakes that traders make when dealing with CSM include: 

Using the CSM without knowing it well and how it functions 

It is only wise to be aware of what you are using. With the rise of fintech, it is now easy to find a live strength indicator that you can use to measure CSM. 

This software comes with an already uploaded formula. Therefore, it is good if an individual is aware of it to ensure it is correct. Randomly using CSM might lead to incorrect results if the formula is not counter-checked. 

Using short time frames 

As stated before, doing CSM measurements over a short time might lead to false forex signals. It is because the price of the currency is easily shifted in a short time. Something like breaking news can cause an increase in price that will give the illusion of a strong currency

Using the CSM to decide on when to make entries 

Some traders make the mistake of assuming that the CSM can also direct them on when to make an entry. 

Simply because the measurement gives the currencies from the strongest to the weakest at a point in time doesn’t mean making an entry at that moment will make you profits. The CSM is only meant for ranking currencies from strongest to weakest. 

Indicators and signals 

Besides the CSM, there are other trading signals (such as a moving average, Relative Strength Index, and stochastic indicator) that traders factor in when currency trading or forex trading. 

To identify these signals, traders run a technical analysis and a fundamental analysis. The fundamental analysis is done when a trader is making a long-term investment. 

The technical analysis is made when a trader is making a short-term investment. 

Essential trading tools. 

On top of carrying out an analysis, a trader also needs trading tools that will be enabling them to invest. Some of the trading tools that traders use include: 
  • Economic calendar – It contains economic news, events, and indicators that affect the currencies’ prices. 
  • Trading calculators/forex calculators - It is used to make the instant calculation of important transaction parameters such as margins, pips, and point values. 

Summary

From the above text, we see that traders use the currency strength meter to identify the strongest and the weakest currency according to rank. An individual identifies the main currencies; the base currency then pairs up the two currencies. 

After that, a trader carries out the CSM measurement then ranks the currencies from strongest to weakest. 

In addition, one can adjust the CSM to suit their strategy and also use it to pick currencies that can help you to ride a huge trend or swing trade. 

The texts also show that one should avoid using the CSM without understanding the underlying formula. On top of that, one should also avoid using it to pick a time to make entries or making short timeframe investments using a CSM. 

Finally, we see that there are other indicators that traders use to make profitable decisions. The said additional indicators include but are not limited to stochastic indicators and moving average. To identify these indicators, a trader runs a technical analysis for short-term investment.

The fundamental analysis is for a long-term investment. The two processes are enabled by some essential tools like economic calendars which contain all the important economic information and events. 

This article is insightful and will prove to be helpful to first-time investors. 
TAGS:
CFD,
Forex trading
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