What is a currency strength meter?

Currency strength meter is a technical indicator in forex trading. CSM shows an at-a-glance view of what is going on in the forex market.

Any trader needs to know the direction of the currency pair. It is also important to remember that the market movement is defined by the strength and weakness of the currencies that make up the pair. But how do we define the strength of a currency? There are different ways, one of which is fundamental analysis. However, it’s not 100% accurate. What provides a clearer view of the currency is the currency strength meter.

The currency strength meter is a general name of the indicator that shows whether you’re dealing with a strong or weak currency. This algorithm-based indicator relies on the exchange rates of various currency pairs to provide a degree of each currency’s strength. 

The currency strength meter analyzes each currency separately, not the currency pairs.

The currency strength meter refers to various indicators that measure the strength or weakness of the currency. 

As there is more than one version of the meter, you should know the differences. The more advanced variants implement their own weightings and may include other indicators that measure the currency’s strength. It helps to provide trading alerts. Simpler versions, on the other hand, don’t use any weighting. 

How does the currency strength meter work?

Now let’s look at how this technical indicator works

 It mostly consists of 4 steps. 

1. The indicator defines the base currency. 

2. Then it pairs the currency with all other currencies that are available for such action. 

3. After that, the indicator measures strength regarding each paired currency. 

4. In the end, the average score is calculated.

The main idea in how to use Forex strength meter is to view it as a “filter”. This indicator help us in understanding what made a pair move. For example, let’s say that EUR/USD is changing. The CSM will help us understand if it is the USD that is becoming strong, of if it’s the EUR that is becoming weak. This is very important to know at all times.

How to measure the strength

Many of the CSM indicators come with their own measuring system. In most cases, it will be a 0-10 strength measurement. The closer the rating is to 10, the stronger the currency is. Remember that this number can go below 1 as well.

Currency Strength Indicator in Action

After understanding how CSM works, now let’s look at using CSM in real trading. Usually, the indicator is used to either confirm a trend or its reversal. By applying it to the chart, you can define a weak and a strong currency. Thus, you’ll know which currency pair to buy and which one to sell. 

However, you should keep in mind that the currency won’t be equally strong or weak relative to other currencies in pairs. 

The main idea is to buy a strong currency against the weak one or sell the weak one against the strong one.

Option 1 :Find the Strongest and the Weakest

It’s the easiest and safest approach. All you need to do is define the strongest currency and the weakest one and trade their pair. 

For example, if the USD is the strongest and AUD is the weakest, you should sell the AUD/USD pair. So, you will simply trade in the trend’s direction. The same approach can apply to the trend reversal if you see the currency reached extreme readings of strength or weakness. 

Option 2: Average Readings

Of course, it doesn’t mean you can trade if only there are extremes of the currency readings. However, this approach is riskier because the currency’s strength doesn’t have a determined limit as gold does, for instance. Thus, it means the currency can continue getting stronger or weaker, and you will simply stay in a bad trade.

Mistakes to avoid when using CSM :

Final words :

The currency strength meter is an interesting tool that can provide additional signals and valuable information on the market direction. Understanding currency strength will be key for developing a long-term forex trading strategy. The strength of a currency is a clear indicator of whether corresponding currency pairs are about to experience a change in value. The currency strength index, the currency strength meter, and other currency strength indicators will directly affect your ability to determine whether a relative value change is likely to occur.

The currency strength indicator can be very appealing especially for beginner traders who are still in the process of learning how to trade.

So, to find your perfect tool, we recommend using a demo account. Winstone Prime demo account can help you practice your strategies using the currency strength meter. The fact that this indicator is customized makes it possible to implement on any trading platform.

Thank you for reading!