What is currency strength?
Currency strength refers to the value of a country’s currency, indicating the relative purchasing power of the currency when traded for goods and services or measured in relation to foreign currencies.
Currency strength is determined by a combination of numerous local and international factors such as the supply of and demand for the particular currency in the foreign exchange (forex) market, the interest rate of the country’s central bank, the inflation rate, the gross domestic product (GDP), and the country’s trade balance.
Currency strength applies to both a country’s domestic economy as well as its value compared to foreign currencies.
With regard to the domestic economy, the strength of a currency is measured as the purchasing power available to consumers to purchase local services and locally produced and manufactured goods. Put differently, the currency strength is measured with reference to the quantity of goods and services bought.
Concerning forex markets, a currency’s strength is determined in relation to the foreign currencies in the forex currency pairs. Expressed differently, currency strength indicates the amount of foreign currency received in exchange for one unit of the local currency.
Generally, the terms ‘weak’, ‘weakening’, ‘strong’, and ‘strengthening’ are interchangeably used to describe the relative value and strength of a national currency against other currencies.
What is a currency strength meter?
A currency strength meter, also referred to as a currency strength indicator, is a visual guide that indicates the strong and weak currencies in forex markets.
Trading with a currency strength meter
Using a currency strength meter has become an essential part of a forex trading strategy.
A currency strength indicator enables a trader to identify strong and weak currencies in real-time. It determines how strong or weak the currencies are in relation to one another, allowing a trader to choose trading strategies, spot opportunities, and trade with confidence.
A currency strength meter focuses on the underlying currencies themselves, creating an aggregate, comparable strength of each currency by using the exchange rates of the different currency pairs. It is a reliable trading tool because related forex pairs are analogous.
A currency strength meter is algorithm-based. Simply put, the value of a currency’s strength is determined by measuring the relative moves on a group of currency pairs that includes the specific currency.
For example, to measure the strength of the euro, a currency meter would calculate the strength of all the currency pairs comprising the euro (e.g. EUR/USD, EUR/JPY, EUR/CHF, EUR/GBP, EUR/AUD, EUR/NZD, and EUR/ZAR) and then combine those calculations to determine the individual strength of the euro.
If the currency strength of the euro is considerably strong, then there will probably be strong moves on euro related forex pairs.
Generally, a currency strength meter measures currency strength on a scale of 0 (weak) to 10 (strong). Furthermore, the timeframe of the indicator defines the measurement interval. For example, the currency strength for a specific hourly (for instance 4 hours) timeframe will be based on the relative moves over the prior specific hour (for instance 4 hours) period.
Currency strength data is shown graphically or numerically on a line or bar price chart.
Currency strength meters are updated according to specific time intervals, for instance, every 5 minutes, and will only refresh when the forex exchange is open.
Aspects to consider regarding trading with a currency strength meter
There are some key aspects to contemplate when appraising currency strength meters in order to make the right choice, suitable for your trading strategy.
Accuracy
It is of major importance that a currency strength indicator measures the strength of currencies accurately.
It is a fact that numerous currency strength meters calculate currency strengths incorrectly. Accuracy problems can also be subtle, displaying strength when it should display weakness and vice versa.
Notwithstanding comprising other fine features, if a currency strength meter lacks accuracy, it is ineffective.
Reliability
Another important feature is the reliability of a currency strength meter’s data source. Frequent and extended outages can be very frustrating and costly, resulting in missed trading opportunities.
Is there a backup server available if the feed from the main data server is interrupted?
Usually, the reliability of data is more of an issue with free forex currency meters, such as website based products.
Data server type
A currency strength meter can obtain its data from two sources.
- Own dedicated data server
This is the best option because dedicated data servers are generally more reliable and faster, with less latency, which, in networking terms, refers to delays in communication over a network.
- Mega Trader trading platform
MT5 (previously MT4) is a trading platform developed by MetaQuotes and used by numerous forex brokers.
This is a popular method used by numerous currency strength meters because the data is basically free.
However, when using a MT4 or MT5 trading platform, a trader may experience the following obstacles:
- It is an additional application a trader is required to run.
- The quality of the data feed might be a problem with some forex brokers that have frequent outages, and unusual spikes in their data. This can influence the accuracy of a currency strength meter.
A live account login or a demo account login can be utilised. Although, it is preferable to use a live account login instead of a demo account login because demo data feeds tend to be less reliable.
Digital platforms
Nowadays, currency strength meters can be found on desktop PCs, smartphones, also referred to as mobile platforms, and numerous websites.
Free or premium currency strength meter?
There is a choice between free and premium currency strength indicators. The latter being a currency meter where a trader is charged for the use of it.
Generally, premium products are more accurate and reliable, with much better support than free products.
A premium currency strength meter is almost a must-have for a professional trader.
Note: This article does not intend to provide investment or trading advice. Its aim is solely informative.
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