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Currency Strength and Weakness Trading

  • #1
  • First Post: Edited Jan 18, 2017 9:36am Jan 17, 2017 2:52am | Edited Jan 18, 2017 9:36am
Hello Traders,

This thread is yet again dedicated to Currency Strength and Weakness.

Currency pairs only move because one currency is strong and the other is weak that is it. This strength and weakness is how trends form and proceed in Forex market. Indicators only make it easier for our eyes to identify, otherwise its always the strength and weakness of price which moves the markets.
When a trader looks at the EUR/USD as a pair to trade and most likely would use a indicator and look for entries. The problem is he is looking at this instrument as a standalone pair which is where everything goes wrong.

The first thing is that the EUR/USD is not one single instrument but it is actually two separate individual currencies. The Euro and the US Dollar are two separate currencies each with its own fundamentals and direction. These two independent currencies form the EUR/USD

Currency pairs are constructed with the base currency on the left and the cross or counter currency on the right. On the EUR/USD the EUR is the base currency.
Each currency pair has two separate currencies which has to be analyzed separately. You are buying one currency and selling the other when you are trading Forex. There is only one way to make a profitable trade. When you make a buy entry the base currency must rise or the counter currency must drop and vice versa for sell.

Remember as traders you are trading individual currencies and not pairs.

Here are the eight most widely traded individual currencies in the spot forex.

USD US Dollar
CHF Swiss Franc
EUR Euro
GBP British Pound
JPY Japanese Yen
CAD Canadian Dollar
AUD Australian Dollar
NZD New Zealand Dollar

Lets take an example :
EUR/USD
EUR/JPY
EUR/CHF
EUR/GBP
EUR/CAD
EUR/NZD
EUR/AUD

The EUR is on the left in all pairs and if EUR is indeed strong then all EUR pairs should be rising.

If EUR/AUD is rising
and AUD/USD is also falling

Then its possible that AUD weakness is causing the movement. Understanding strength and weakness is fairly simple and this is what causes pairs to move. The 28 pairs movement is totally dependent on the 8 big currencies.

I highly recommend you download mt4 from liteforex and start watching individual index charts to understand this subject better.

Please check the attached images for a strength and weakness example.

You can access the individual index charts by downloading metatrader 4 from Liteforex. I have given the link below

https://www.liteforex.com/downloads/mt4/

Its important you know the underlying strength and weakness before you place trades.

I place quick day trades due to time constraints by simply watching underlying strength and weakness and place entries on pullbacks for anywhere from 15 to 40 pips

See you in the next post

Capito
Attached Image(s) (click to enlarge)
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  • #2
  • Jan 18, 2017 9:36am Jan 18, 2017 9:36am
Hello Traders,

Lets continue.

Determining a strong and weak currency before entering any pair is the most important criteria, in fact I would say it’s the core of the analysis. There are numerous brokers who offer currency indexes in mt4 chart format, which makes life easier in analyzing currency pairs.

Irrespective of the strategy you trade just simply add this extra spice called strength and weakness. You will see a immediate change in your trading results.
For those of you who need to access the individual currency indexes you can access them with Liteforex. We have given you the direct link below
https://www.liteforex.com/downloads/mt4/

Please make sure you right click on the market watch window select “Show All” to make sure you can see all the individual currency index charts. The individual charts have the suffix “LFX”. Please check the image below

You can simply pull up the LFX charts and clearly see which currency index is trending. Below example shows USD trending up and EUR trending down. Its simple your best decision would be look for short positions in EURUSD.

Now in the next image take a quick look and you will have a snapshot of the entire market with 8 simple charts and it becomes easier for you to pick the right pair for analysis.

Start watching the index charts everyday.

Thanks
Capito
Attached Image(s) (click to enlarge)
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Click to Enlarge Name: EU-1024x523.png Size: 240 KB
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  • #3
  • Jan 18, 2017 12:23pm Jan 18, 2017 12:23pm
Quoting capito
Hello Traders, Lets continue. Determining a strong and weak currency before entering any pair is the most important criteria, in fact I would say its the core of the analysis. There are numerous brokers who offer currency indexes in mt4 chart format, which makes life easier in analyzing currency pairs. Irrespective of the strategy you trade just simply add this extra spice called strength and weakness. You will see a immediate change in your trading results. For those of you who need to access the individual currency indexes you can access them...
Hello Capito,

Thanks for the thread and a detailed explanation. Looking forward eagerly to learn more.

1. I installed the Lite Forex MT4. The dollar index on Lite forex shows as 2.05. While in other places, like on investing.com website, the dollar index is around 100. Are they one and the same? If so, why the difference.

Dollar Index on Investing Website:

2. This doubt has been bugging me:

From what i researched, the Dollar index is calculated against a basket of 6 currencies (Euro being one of them) and EURO index is calculated against a basket of 4 currencies (US Dollar being one among them).

Assuming we trade EUR/USD. I sort of understand that Dollar Index or Euro Index is calculated without any dependencies on other currencies and then comparing the value, it would make sense to get the strength or weakness of EUR & USD.

But in the calculation of Dollar Index, Euro is involved and similarly in the calculation of Euro Index, dollar is involved.

Now by comparing Dollar Index to Euro Index, there is a sort of loop or inter dependency.

What is your take on this?


Once again thanks for the thread...
  • #4
  • Jan 19, 2017 11:33am Jan 19, 2017 11:33am
Quoting aaven
{quote} Hello Capito, Thanks for the thread and a detailed explanation. Looking forward eagerly to learn more. 1. I installed the Lite Forex MT4. The dollar index on Lite forex shows as 2.05. While in other places, like on investing.com website, the dollar index is around 100. Are they one and the same? If so, why the difference. Dollar Index on Investing Website: 2. This doubt has been bugging me: From what i researched, the Dollar index is calculated against a basket...
Hi Aaven

Glad you liked the thread

1) Honestly, I only use USDLFX charts so I am too sure other websites. However, I can confirm the charts would look the same. And its worked for me so I stick to my LFX charts

Also about calculations its quite simple
They behave similar to that of the Dollar Index for example, which is a weighted index of the US Dollar against its major currency trading partners.

Liteforex currency indices are calculated as below

USDLFX for example is calculated as follows:
USDLFX = [(USDCAD*USDCHF*USDJPY)/(EURUSD*GBPUSD*AUDUSD)]^1/7
The remaining currency indices are a multiplier of the USDLFX.
EURLFX = USDLFX * EURUSD and so on.
Example:
USDLFX = 1.5255
EURUSD = 1.2333
EURLFX = 1.5255*1.2333 = 1.8813

This calculation was on the liteforex website now they have removed it. Don't get into calculations as the charts will do the job for you. Also, in case you are worried if Liteforex shuts down LFX charts do not worry you access similar charts with GCI trading.

Its been over 5 years and liteforex still provides these charts. So bottom line I do not care too much about the calculations as long as it does the job.

Thanks
Cap
  • #5
  • Edited 10:23am Jan 23, 2017 12:28am | Edited 10:23am
Hello Traders

23rd Jan 2017

Weak readings on USD and on the strong side GBP continues to gain strength. Today there are no major news releases which could potentially hamper your trades.
Looking for buy entries on gbpusd when price pulls back on smaller time frame.

Thanks
Cap
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  • #6
  • Mar 6, 2019 2:18am Mar 6, 2019 2:18am
Quoting capito
Hello Traders 23rd Jan 2017 Weak readings on USD and on the strong side GBP continues to gain strength. Today there are no major news releases which could potentially hamper your trades. Looking for buy entries on gbpusd when price pulls back on smaller time frame. Thanks Cap {image} {image} {image}
Nice strategy trading bro, very unique.. i want to keep watching these thread.. maybe u should often post ur analysis signal

Best Regards
  • #7
  • Mar 29, 2021 10:11pm Mar 29, 2021 10:11pm
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  • #8
  • Apr 18, 2021 12:49am Apr 18, 2021 12:49am
I will be sharing weekly trade setups from next week. Stay tuned
  • #9
  • Oct 5, 2021 9:31pm Oct 5, 2021 9:31pm
Month of October begins with YEN weaknes..

CADJPY and GBPJPY both trending with BUY opportunities.
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  • #10
  • May 17, 2022 9:04am May 17, 2022 9:04am
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