Currency strength (Wikipedia) is basic forex technical analysis term used for current trend of currency.But how to trade with currency strength?This is main point of this article.
Currency strength is strength of one currency and not a currency pair.That means you have simple chart with 8 lines (8 because there is 8 major currencies EUR, GBP, AUD, NZD, USD, CHF, JPY) showing you strength of every single currency.
It’s based on mathematical decorrelation of 28 cross currency pairs.It shows absolute strength momentum of selected major currency
There are two types of currency strength indicators.Relative currency strength (RCS) and Absolute currency strength (ACS) indicator.
Relative currency strength (RCS) — (Wikipedia) is a indicator showing relative strength.That means it doesn’t show you price of currency, but strengthening or weakening.On the relative strength you can see like RSI on every currency separately.The RCS is typically used on a 14*period timeframe, measured on a scale from 0 to 100 like RSI, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum of currency.
Absolute currency strength (ACS) — (Wikipedia)
is a indicator showing absolute strength.That means it doesn’t show you price of currency, but strengthening or weakening in percentage for pselected period.On the absolute strength you can see percentage gain or loss on every currency separately.The ACS is typically used on a 15*period timeframe,calculated as a percentage gain or loss.This indicator is not measured on a scale like Relative currency strength . Shorter or longer timeframes are used for alternately shorter or longer outlooks.Extreme high and low percentage values occur less frequently but indicate stronger momentum of currency
Combination of Relative currency strength and Absolute currency strength indicators gives you entry and exit signals for currency trading. This combination is called Forex Flow indicator fromFlowindi.com.
Trade with Relative currency strength and Absolute currency strength is very simple.
Indicator basic idea is «buy strong currency and sell weak currency«.
If is X/Y currency pair in uptrend,it shows you if it’s due to X strength or Y weakness.
On this signals you can choose the most worth pair to trade.
A line going up means a strengthening currency. The line going down is a weakening currency.
- Select the most strengthening currency (for example USD) and most weakening currency (for example GBP) from relative strength chart.Start trade pair consisting of this two currencies USD/GBP pair.
- Select the currency over 80 and second currency under 20 on RCS indicator. This currencies creates best pair to trade.
Use ACS everytime like support indicator.Relative currency strength shows you just there is big change in price of currency and currency could be oversold or overbought ,but how big is this change of currency price you can see in percentage on ACS indicator.
Or you can follow one of classic signals
Where can I find this indicators
All of these screenshots comes from freelance research group called Flowindi.com.And their speciality is Forex Flow indicator and Market Flow indicator.So you can try this indicators on their web-based technical analysis aplication.
Information about Forex Flow indicator
- Wikipedia : Currency strength ,Relative currency strength , Absolute currency strength
- Research : http://Flowindi.com
Source : Wikipedia,Flowindi.com