The currency strength indicator sets we show you in this article leverage the fact that currency pairs are made up of two individual currencies. We will show all forex traders several simple currency strength indicators, and show you how to profit from them. When one currency is moving up and another is neutral or moving down in a pair, a trader can generate pips and profitable trades from this scenario. So we will set up our indicators to give us this information, trade after trade. Traders can generate profits on a real time basis real time and over longer time periods, using the individual strength or weakness information. These techniques and indicators are effective on all of the major currencies like the USD, CAD, EUR, CHF, GBP, JPY, AUD, and NZD.
Currency Strength Versus Indicators
Most forex traders use the standard technical indicators, which are based on currency pairs, not individual currencies, and just one time frame. This is a fundamental flaw and wreaks havoc on most forex traders. With this type of indicator setup a trader cannot see whether or not the individual currencies that compose the pair are strong or weak. Standard indicators measure parameters for the entire pair, not the individual currencies. The Fibonacci, RSI and Stochastics and anything like this are totally unreliable for forex trading and do not measure individual currency strength. Indicators like this cause great confusion among forex traders.
Real Time Currency Strength Indicator
There are two types of currency strength indicators, real time and trend based. A real time currency strength indicator is for current market conditions and to assist with entering trades. Trend based indicators are for market analysis. They are for analyzing individual currency trends, and are for the larger picture or overall market analysis. There are some very complicated real time currency strength indicators, but the one you see below is quite simple and effective.
This real time currency strength indicator makes it obvious which currencies are strong or weak and gives any trader validated trade entries in real time. This indicator is called The Forex Heatmap®. It works best when trading in the direction of the major market trends. This indicators can also be used for short term day trading or short term trading against the trend on the smaller trends and time frames.
The example real time currency strength indicator you see in the image above is for Canadian Dollar (CAD) currency weakness, but the The Forex Heatmap® also provides similar signals for a total of 8 currency groups in two directions. The signals are real time and all visible on one web page.
Currency Strength Trading Strategies
Two currency strength trading strategies are possible. Understanding the condition of the total market across various individual currencies is one strategy, and the second strategy is using currency strength for entering trades, with live currency strength tools like the heatmap.
For the market conditions, traders can determine which currencies are strong or weak in the overall market by looking at simple forex trend indicators on the larger time frames, like the H4 time frames and larger. Here is a simple example: if all of the JPY pairs are trending higher on the D1 time frame, you know the JPY is weak. Therefore all of the JPY pairs should be moving higher and this is the direction you should trade in, following the larger trends and market momentum.
Traders can set up their charting platform to group all of the JPY pairs together so it is much easier to see. Then you can repeat this process for any currency, like the EUR pairs, USD pairs, etc. This strategy alone will change the way you think about the forex market. Anyone can perform this type of currency strength analysis, even beginner traders, in 10-15 minutes or less for a few currencies. Exponential moving averages like these shown below, applied to larger time frames like the H4, D1 and W1 time frames will work just fine.
The second currency strength trading strategy is a real time indicator for currency strength or weakness. For managing your trade entries, you can also determine which currencies are strong and weak in real time using a simple real time currency strength indicator like The Forex Heatmap®. Anyone can read the heatmap, even beginner forex traders.
In this example it is clear that the New Zealand Dollar (NZD) is weak. The strategy here is to pair the NZD weakness with another currency that is neutral or strong, for more accurate trade entries. In this case, having the right indicators and using them correctly to make successful trade entries, like selling the NZD/USD or buying the EUR/NZD, will improve your trade entries dramatically. Profitable forex trade entries are now possible with tools like this. Just match a strong currency with a weak currency in real time and you have a potential entry.
This heatmap currency strength indicator is an easy to interpret data visualization tool for real time currency strength. It organizes the information from 28 currency pairs into a visual map of the market for accurate trade entry decisions. When you know the overall market condition, naturally your trade entries will improve. If you can match up an entry point with a pair that is trending you and safely enter the trends of the forex market and the trade will move into profitability in real time. You then have a chance to ride the trends for several days or possibly weeks in a trending market.
To round out your trading currency strength trading strategy and one more criteria, support and resistance. If you enter a trade and there is no support or resistance nearby, your odds increase again of making a lot of pips and holding on to the trade until you’re the next major support or resistance is hit on that pair. You can check support and resistance levels easily on any pair in just a couple of minutes.
Should Forex Traders Use A Currency Strength Indicator
Most definitely, yes. The primary reason for traders to use any currency strength indicator or strategy is that the alternative methods, like technical indicators, simply don’t work. You will never know when not to trade or when conditions are favorable to trade with standard technical indicators. Another reason is that you will always know the condition of the overall market using these two currency strength indicators, and you will not have to click on a bunch of charts for a real time analysis of the market. Using currency strength and weakness keeps the emotions out of your trade decisions and emotions give way to using market logic to govern your trades. Currency strength trading is straightforward and any forex trader can learn it, even beginner currency traders.