Making Currency Strength Analysis more useful


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Another area I recently got involved with was Currency Strength. You've seen a lot of these "toy" Currency Strength Meters which may be interesting to watch, but can they help you find trade entries, and actually make money? Not so much.

Many issues arise in Currency Strength estimation, one of which is the "stability" of the relative strengths over time. Most of these "toy" algorithms use the previous Day's Range as the basis for calculations.

I thought this was useless, so I decided to use the past 10 days of history, as the much more "stable" reference for calculations. This has several benefits:

1) it avoids "discontinuities" in the measurements from one day to the next, which
2) facilitates recording of more stable measurements over time, for Trend Analysis

So now we are able to log stable data over time, then we can look at Currency Trending itself, which is the basis for Currency Pair valuations, rather than simply Currency Pair Trending. (see the difference?)

Another area I figured out was Over Bought and Over Sold measurement, based upon internal Currency Strength relationships. Instead of just looking at Moving Averages, this actually "factors out" a specific Currency Pair and compares its current actual valuation against its "Cluster" of related Pairs "predicted" valuation.

Market Makers very much "distort" the pricing of particular Currency Pairs. This is how they respond to Support and Resistance areas, for each Currency Pair, even though Currency Pairs in Forex have "internal constraints". So Market Maker distorts these relationships for a specific Currency Pair, either forcing it "too high" or "too low" for purely Trading purposes, again to confuse Traders. We assume these "distortions" will need to be resolved in the fairly near term so we can fade these to some extent in the short term.

So we Look at the Currency Pair's "Strength" against the Strength predicted by its "Cluster" of related Currency Pairs. A "Cluster" is the group of Currency Pairs which has a given Currency in common. We look at just the 28 major pairs, and 8 major underlying Currencies.

We can thus see when a particular Currency Pair is being distorted by Market Maker, above or below the value which is "predicted" or "should" have based on its "Cluster" consensus strength (internal constraints). For me, this is one of the keys to short term Trading opportunities.

So the software dynamically alerts the Trader for Over Bought Currency Pairs, as well as Over Sold Currency Pairs. This can be used for short term scalping opportunities if you are looking across the market using 28 dominant Currency Pairs.

I'll post a couple of screenshots, one showing 4 days of Currency Strengths; and another showing a couple of weeks over the Holiday period. This is real data from the most recent trading period over the holidays and to the close of trading yesterday.

I'll mention in some followup posts certain Trading Strategies which might be used with this information.

Does anyone use Currency Strength as a major factor in their Forex Trading ?



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89 10
The Lucrative London Open Strategy Example

OK, once we have the ability to continuously track Currency Strengths in real time, we can start to watch for "trading signals".

Here's one we've used successfully, taking advantage of the London Open. We can consider this to be a major known Daily event which results in generally large moves sometimes from 50-100 pips, depending upon "skill" and a bit of "luck".

But we're trying to choose among the 28 Currency Pairs scanned by the facility, the pair or pairs which offer us the Highest Probability. We want to use Technical Analysis, rather than merely guessing.

Here we "fade" the "setup" of Strengths prior to the London Open Session, hoping that the "hook" pattern is a "distortion" which will collapse back toward the mean in an hour or a few hours into the London Session. This is what we expect, and with a bit of L.U.C.K. it will work ! :) We assume Market Makers introduce or "engineer" deliberate distortions prior to significant events. In this case, USD/JPY is rising aggressively, tempting many Buyers into the market PRIOR to the London Open. Then Market Maker will DUMP these Buyers, and cash in on a lucrative drop.

Remember that Market Maker is Net Short when there are Buyers (takes the opposite side of every Retail transaction), so the drop in the USD/JPY pair is Market Maker's "cover" (at a much lower later price) of the MM Short position (taken at a rising higher price prior to the open) against the predominance of Retail Buyers who committed themselves prior to the open. Yep, it's a manipulated market, People, so don't forget who your enemy is..... :)

By choosing the Currencies which appear to have the maximum "hook" distortion, we attempt to maximiz(s)e our chances of a Big Win !! Or at least perhaps a trade which does not go much against us....

IF BOTH of the Currencies' Strengths change direction we have a relatively Huge move in the Currency Pair. If only 1 of the 2 makes the reversal, we still are likely to have a Positive trade result, worst case likely a Neutral result without much moving against us.

Remember Currency Pairs are just Ratios or Fractions representing one underlying Currency strength (USD) divided by the other underlying strength (JPY). Remember your math with numerator and denominator, etc and it's very simple what we expect to happen...


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Fendy Chia

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The dollar fell slightly against the yen in Asian trade Tuesday, with dip-buying kicking in to lift the greenback off a one-month low.

The euro EURUSD, -0.29% was almost unchanged at $1.1839 from $1.1837.

The WSJ Dollar Index BUXX, +0.29% a measure of the dollar against a basket of major currencies, was up 0.06% to 83.95.
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