how to trade using acurrency strength meter

 

The concept of trading currencies in pairs sets the Forex (FX) market in a class of its own. Trading currencies are therefore quite different from trading any other asset class.  currency strength meter

When you trade currencies, you are exposed to not one currency, but a pair of currencies. While this presents a number of lucrative opportunities, it also requires the development of special skills on the part of the trader. One of these skills is the ability to measure the strength or weaknesses of various currencies.

Since currencies are traded in pairs, it becomes very difficult for the trader, especially the beginner, to gauge the performance of just one of those currencies. For example, if you learn that EUR/USD is gaining fast, you may find it difficult to determine whether the pair is gaining because of the strength of the Euro or the US Dollar.

But there is a solution to this difficult problem of measuring currency strength and weakness, and this solution comes in the form of an online Forex indicator that goes under the name of currency strength meter.

Currency strength meters also go under the name of currency strength indicators. To put it very simply, they are visuals that depict the strength and weaknesses of the major currencies of the world.

How do they do this? They take into consideration the exchange rates of various pairs of currencies to create an aggregate and comparable strength for each currency.

No two currency strength meters are alike. While some of them are so simple that they do not consider any weighting, some are advanced tools that use their own weightings. Some currency strength meters or indicators use permutations and combinations of other indicators along with measurements of currency strength or weakness to create their own trading signals.

Let us try to illustrate the working of a currency strength meter with a simple example.

Consider, for example, that you would like to know how strong the USD is at present. Your currency strength meter will first calculate the strength of all currency pairs that contain the USD. It will then put the results together to determine the strength of the USD.

Currency strength meters may also use more comprehensive, but little-known measures such as the broad USD index, which incorporates a wide range of currencies. These tools also calculate the strength of all currency pairs containing the US Dollar and then pool those calculations to get a single number. Then they apply weightings for all the currencies. The weighting applied to the broad USD index is obtained from a large body of trading data.

So what are the various advantages of using Forex currency strength meters or indicators?

In the first place, currency strength meters are simple tools that are very easy to use. As a short-term indicator, it is invaluable. It has the ability to protect traders from needless hedging and double exposure. Also, it can determine the risk level of the trades you have just entered.

However, its biggest advantage is that it is available free of charge although you have to pay to get hold of the more complex currency strength meters in the industry.