The absolute currency strength (ACS) is a
technical indicator
In technical analysis in finance, a technical indicator is a mathematical calculation based on historic price, volume, or (in the case of futures contracts) open interest information that aims to forecast financial market direction. Technical ind ...
used in the
technical analysis
In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sa ...
of
foreign exchange market
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
s.
It is intended to chart the current and historical gain or loss of a currency based on the closing prices of a recent trading period. It is based on mathematical
decorrelation
Decorrelation is a general term for any process that is used to reduce autocorrelation within a signal, or cross-correlation within a set of signals, while preserving other aspects of the signal. A frequently used method of decorrelation is the use ...
of 28 cross
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 ...
s. It shows absolute strength momentum of selected major currency (EUR, GBP, AUD, USD, CAD, CHF, JPY).
The ACS is typically used on a 15*period timeframe, calculated as a percentage gain or loss. This indicator is not measured on a scale like
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 ...
.
Shorter or longer timeframes are used for alternately shorter or longer outlooks. Extreme high and low percentage values occur less frequently but indicate stronger momentum of currency.
ACS is in most cases used as support indicator for relative
currency strength
Currency strength expresses the value of currency. For economists, it is often calculated as purchasing power, while for financial traders, it can be described as an indicator, reflecting many factors related to the currency; for example, fundament ...
indicator. But it can be used by itself for currency trading. One can use absolute currency strength for pattern trading as well. Combination of RCS and ACS indicators gives entry and exit signals for currency trading.
Basic idea
Indicator basic idea is "buy strong currency and sell weak currency". If is X/Y currency pair in uptrend, it shows if it is due to X strength or Y weakness. On this signal one can choose the most worthy pair to trade.
Advantages for trading strategies
Absolute currency strength can be used as a support indicator for technical analysis in combination with relative currency strength. It is an information indicator to realize which currencies are being demanded, this is an ideal indicator for trend follow traders.
It helps
scalpers looking for strength trend (trader can see both absolute and relative strength).
It is an instrument for correlation/spread traders to see reactions of each currencies on moves in correlated instruments (for example CAD/OIL or AUD/GOLD).
See also
*
Relative strength index
References
{{DEFAULTSORT:Absolute Currency Strength
Technical indicators