Currency strength expresses the value of currency. For economists, it is often calculated as

purchasing power Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...

, while for financial traders, it can be described as an indicator, reflecting many factors related to the currency; for example, fundamental data, overall economic performance (stability) or interest rates. It can also be calculated from currency in relation to other currencies, usually using a pre-defined currency basket. A typical example of this method is the U.S. Dollar Index (USDX).

Currency strength based trading indicators

There are two types of currency strength calculations: fundamental based, and price based. Generally, price based currency strength is calculated from the USDX, 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 X/Y

currency pair A currency pair is the dyadic quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market. The currency that is used as the reference is called the counter currency, quote currency, or ...

is up trend, it can be determined whether this happens due to X's strength or Y's weakness. For the calculation of indexes of this kind, major currencies are usually used because they represent up to 90% of the whole forex market volume. In the minority of cases, fundamental based currency strength (also known as macro currency strength) is calculated from aggregating various leading economic reports, including but not exclusive to: ISM Reports, Consumer Surveys (UMCSI),

Interest Rates An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...

, and much more. With indicators like above, one is 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; and observe most of the forex market in one chart. The current trend in currency strength indicators is to combine more currency indexes in order to make forex movements easily visible.

Examples

Typical examples of indicators based on currency strength are

relative currency strength The Relative currency strength (RCS) is a technical indicator used in the technical analysis of foreign exchange market (Forex). It is intended to chart the current and historical strength or weakness of a currency based on the closing prices of a ...

and

absolute currency strength The absolute currency strength (ACS) is a technical indicator used in the technical analysis of foreign exchange markets. It is intended to chart the current and historical gain or loss of a currency based on the closing prices of a recent tradin ...

(percentage). Their combination is called the "Forex Flow indicator", because one can see the whole currency flow across the forex market.

References

{{DEFAULTSORT:Currency Strength Technical analysis Strength Foreign exchange market

Currency strength based trading indicators

Examples

See also

References