How does the currency strength meter work?
Before we start explaining how the currency strength meter (CSM) works, let’s try to explain what a currency strength meter is in the context of Forex trading. CSM currency strength meter is a technical indicator rather than an external software that is used to analyze and predict future market prices. However, it can be both, as already mentioned in the introduction. You can find and download an app that measures the strengths of given currencies, or you can use algorithms and integrate the indicator with your trading platform. For instance, the currency strength indicator MT4 can be opened using the MetaTrader 4 platform. Determining the strength of currency prices can help traders make more informed decisions.
Now let’s find out how the CSM currency strength meter works and how it can help traders to make better decisions before placing an order. The process consists of 4 steps:
- Determine base currency
- Pair given currency with all available currencies
- Calculate strength relative to each paired currency
- Calculate the average score
The main idea in how to use the Forex strength meter is to view it as a “filter”. This indicator helps us understand what made a pair move. For example, let’s say that NZD/USD is uptrending. The CSM will help us understand if the reason behind is USD's decline or NZD's strength. The currency strength meter indicator takes given currencies, measures their performance in relation to a basket of major currencies, and displays results.
Another critical thing to consider is that the strength meter of a specific currency is always determined through the timeframes you have set for it. For example, the strength of the USD may be really high in the daily timeframe, while very low if you open the indicator for the 5-minute timeframe.
Forex meter indicators help traders increase the accuracy of their predictions. For instance, If one currency is making sharp moves and is trending, while another currency is ranging, it might be wise to avoid placing orders against the trending one. What's more, Forex meters help fundamental traders locate active currencies and investigate their behavior.
How to measure the strength
Most CSM indicators come with their own measuring system. In most cases, it will be a 0-10 strength measurement. The closer the rating is to 10, the stronger the currency is. Remember that this number can go below 1 as well. In addition, position traders and longer timeframe traders such as swing traders are using daily currency strength meter, while intraday traders are using live currency strength meters.
Mistakes to avoid when using CSM
The biggest mistake that most beginners make when using CSM is that they only rely on using CSM and nothing else. In order for this indicator to bring you the desired outcome, it is vital that you pair your trading with additional trading tools. Forex meters only show which currency is in action in a given currency pair and which currency is dull in a given timeframe.
The next mistake is to not calculate the strength of a currency in contrast to major currency pairs. You see, in order for the USD to be strong, it needs to be strong against the EUR, GBP, CHF, JPY, and other major currencies. The euro and US Dollar are the world's two biggest reserve currencies, and the EUR/USD pair is the most traded one. The currency pair performance can highly influence the valuation of other pairs that include these currencies as either base or quote currencies.
The third and final mistake is using only short time frames. In order to use the Forex strength meter for trading, it’s preferred to use it with longer timeframes. This includes a couple of weeks or months timeframes. Only then will the strength of the currency be accurate. Remember, there is always some kind of news that could sow panic in the market, thus causing a major, but temporary disruption. This can seriously damage a currency’s strength in a shorter time frame. For this very reason, technical traders avoid placing orders during news announcements
How to trade FX with Currency Strength meter - Key takeaways
The currency strength meter is an indicator that is usually the first tool that traders use when they start their analysis. The meters measure the strength of given currencies in relation to a basket of major currencies.
The usage depends on the timeframe. Position traders are using daily currency strength meters, while intraday traders are using live currency strength meters. Remember to always look at what state the market is in at the moment, if it is recovering from a huge spike, the CSM’s data may not be useful. CSM helps traders avoid trading against currencies that are strongly trending.
Trading with Forex strength meters can easily be disrupted by some form of even in the market that brings massive change. This can be a news piece or some kind of economic issue. Spikes and plunges always make the CSM less accurate.