How does the currency strength meter work?
Before we start explaining how the currency strength meter (CSM) works, let’s try to explain what is a currency strength meter in the context of Forex trading. CSM is a technical indicator rather than an external software that is used to analyze and determine the market. However, it can be both as already mentioned in the introduction.
The most reliable version though is believed to be the one designed for trading software.
Now let’s find out how this technical indicator works and how it can help traders to make slightly better decisions before placing a trade. It mostly consists of 4 steps.
- Determine base currency
- Pair said currency with all available currencies
- Calculate strength relative to each paired currency
- Calculate the average score
The main idea in how to use 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 changing. The CSM will help us understand if it is the USD that is becoming strong, of if it’s the NZD that is becoming weak. This is very important to know at all times.
Another important 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 for today’s timeframe, but in terms of the monthly analysis, it is one of the weakest in the list.
Although the FX multi currency strength meter could be helpful with these small pockets of opportunity, such as a strong currency for a day, it’s usually best to look at a larger picture if you prefer placing longer trades.
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.
Mistakes to avoid when using CSM
The first mistake that most beginners make when using CSM is that they only use CSM. In order for this indicator to bring you your desired outcome, it is vital that you pair your trading with Forex strength meter with other indicators and chart analysis.
The CSM is just the foundation of your analysis, it simply helps you filter through the currencies which are worth analyzing at a current time. Once you do know the preferred currencies, it’s up to the chart to determine if it’s worth trading them.
The next mistake is to not calculate the strength of a currency in contrast to major currency pairs. You see, in order for USD to be strong, it needs to be strong against the EUR, GBP, CHF, JPY, and other major currencies. It is already obvious that the USD is strong against other currencies that are not traded as much.
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 frame, but longer frames help balance that issue much more easily.
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. It is used to see what strong currency to pair up with a weak currency and then validate this on the currency pair chart.
The CSM is not 100% accurate. It depends on the timeframe you choose, which is why the longer the timeframe the higher the accuracy. Remember to always look at what state the market is in at the moment, if it is recovering from a huge spike recently, the CSM’s data may not be useful no matter how accurate it may be.
Trading with Forex strength meter 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.