Currency strength expresses value of currency. By economists it is often calculated as
purchasing power,
while by financial traders it can be described as an indicator, reflecting many factors related to the currency, for example fundamental data, overall economic performance or interest rates. It can also be calculated from currency relation to other currencies, usually using pre-defined currency basket. Typical example of this method is the
U.S. Dollar Index. The current trend in currency strength indicators is to combine more currency indexes, in order to make
forex movements easily visible. For calculation of these kind of indexes are usually used
major currencies, because they represent up to 90% of the whole
forex market volume.
Currency strength based trading indicators
Currency strength is calculated from the
U.S. Dollar Index which is used as a reference for other currency indexes.
The basic idea behind indicators is "
to buy strong currency and to sell weak currency".
If is X/Y currency pair in up trend, you are able to determine whether this happens due to X's strength or Y's weakness.
:
With this kind of indicators you are able to:
- choose the most valuable pair to trade.
- see the reactions of each currency on moves in correlated instruments (for example CAD/OIL or AUD/GOLD)
- look for a strong trend in one currency
- observe most of the forex market in one chart
Typical example of indicators based on currency strength are
Relative currency strength and
Absolute currency strength. Their combination is called Forex Flow indicator, because you are able to see the whole currency flow across the forex market.
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