If you are new to the forex trading world, one of the most important tools you’ll need to get acquainted with is the currency strength meter indicator. If this isn’t something you are familiar with, well you’ve come to the right place. In this article, we’ll break things down into bite-size chunks of information so you can make your approach to forex trading more profitable. So, let’s crack on:
What is a Currency Strength Meter Indicator?
Forex traders looking to make gains on the market need to have a knowledge of which currencies are strengthening and which a losing value. To put it simply, a currency strength meter (CSM) does just that. It provides an indicator of which strong currency should be paired up with which weaker currency. It basically tells you which currency pairs are worth keeping an eye on. While traders may already be aware of certain technical indicators which provide insights about the market, the currency strength meter is more focused on telling a forex trade when to make their move.
How Exactly Does a Currency Strength Meter Work?
There are four stages in the process of using a currency strength meter. It starts by helping a forex trader determine their base currency. Next, it gives the trader an indication of how the base currency paid with all other available currencies. The currency strength indicator subsequently calculates the base currencies’ strength relative to each paired currency before finally providing a calculation of the average score. Essentially, the strength meter is a sort of ‘filter’ that helps traders understand what makes currency pairs move. For instance, let’s take ZAR/USD and the pair is changing, our currency strength meter will help the trader understand if the USD is getting stronger or if the ZAR is getting weaker. This type of information is key for those looking to make good trading decisions.
Common Mistakes To Avoid When Using A Currency Strength Meter
While that may make it sound like a fairly straightforward process, forex trading is anything but. So it is important to avoid making mistakes when using a currency strength meter. The first mistake many novice traders make is that they rely too heavily on a currency strength meter without acknowledging that a holistic trading strategy needs to use other indicators and chart analysis too. While it is absolutely fine to use the currency strength meter as the basis for your analysis, once you’ve established which currencies you are working with you need to use charts to determine whether it is worth trading them. Often traders fail to calculate the strength of a currency in contrast to major currency pairs. Another common mistake is making use of inaccurate strength meters which can’t provide realistic forecasts. Finally, a further pitfall is that traders think short-term when strength meters provide better information when analyzing long term. It is always worth bearing in mind that there is always some sort of news that could cause panic and disruption for the currency markets in the long term but the forecast in the long term will generally remain quite stable.
Ultimately, currency strength meter indicators are a foundational tool for forex traders looking to make informed decisions about their trading strategy. However, in isolation the currency strength meter won’t provide a truly accurate picture of the market and therefore should be combined with other indicators to shape a truly robust strategy for successful forex trading.