For profitable trading in the financial markets use special tools. All of them are divided into certain groups and perform specific functions. This article will examine a popular tool for traders among traders - an indicator of the strength of currencies. The reader will find out what types of trading tools exist to determine the strengths and weaknesses of currency pairs, their functions, as well as how to use them in trading.
Determining the strength of currencies
Before you use the appropriate tools for trading in financial markets, you need to understand what currency strength is. By definition, if we consider its classic version, then this is the arithmetic difference between the number of open positions in the market for sale and purchase in relation to other currency assets or pairs. That is, it is inexpedient to consider the strength of any particular individual currencies; a comprehensive analysis of the currency pairs directly must be carried out.
The best option for identifying this parameter is a technical tool specially developed for analysis and trading - an indicator of the strength of currencies. Over the many years the financial market has been working, experts and professionals have identified the regular characteristics of the movement between assets and their correlation. As a result, various options of specialized tools are available for traders to determine the strength or weakness of currencies.
Types of Indicators
The movement in the financial markets is due to many different constituent parameters. It can be:
- important economic or political news;
- events happening in the world;
- speculative transactions on exchanges of major market participants and much more.
And also the movement is determined by the correlation between the currencies. That is: the stronger / more expensive one currency is, the weaker / cheaper the asset interconnected with it. In order to understand the weakness or strength of a currency against another, special tools are used in trading.
Types of currency strength indicators:
- Bulls Power and Bears Power.
- Dollar and euro indicators that calculate their indices.
- Currency Power Meter.
- Relative Strength Indicator.
- Currency Slope Strength.
- Cruscotto and other options.
All technical indicators have their own characteristics and characteristics. For example, one of the most popular tools for traders is the indicator of the strength of currencies for MT4 - Bulls Power and Bears Power. In terms of its parameters, it is very convenient and does not require special additional settings, and it is also easy to use and therefore is located on almost all trading platforms for trading by default.
Tool Functions
The main function of this tool is to determine the strength or weakness of one currency in relation to another asset. All currencies are interconnected and are directly dependent.
Each trading currency asset consists of two components: the main / base currency and the quoted / dependent asset. For example, consider a couple of Eurodollars, where the European currency is the main asset, and the American dollar is the currency dependent on it. Therefore, if the euro rises in price, then the dollar will fall accordingly.
In addition, a correlation is traced between currency pairs. In trading, there are two types of relationships: direct and inverse correlations. Based on these patterns, special technical tools were developed, for example, such as an indicator of the strength of currencies. It helps traders determine the strength of one asset and identify the weakness of another.
These tools can be presented in the form of a histogram, lines, scales and even have non-standard solutions, such as an indicator of the strength of currencies in the form of hours.
Description of a tool for determining the strength of currencies
To understand how indicators that determine the strength or weakness of currencies work, you need to know their main characteristics, functions and purposes.
For example, the article will examine the Bulls Power and Bears Power indicators. This tool is presented as a histogram. If a trader analyzes charts and makes transactions on the MetaTrader trading platform, then you do not need to specifically install it, since it is already by default. The indicator displays the strength of the “bulls” and “bears”, and also by its parameters you can determine the strength or weakness of one currency in relation to another asset in the traded pair.
Analysis of Bulls Power and Bears Power indicators:
- If the Bulls Power parameters are high and the bars of the histogram have far gone up, then the base currency is stronger than the quoted asset.
- If Bears Power has lower indicators and the histogram bars go down quite far, then the quoted currency is stronger than the underlying asset.
In the analysis of forecasting market movements, it is necessary to simultaneously take into account the parameters of Bears Power and Bulls Power. To understand which currency is stronger, you need to analyze both assets. The lower the value of one currency, and its histogram bars are closer to zero, the weaker it is with respect to another asset.
Similarly, there is an analysis of other indicators, which are presented in the form of lines or scales.
Closed cycle FI indicator description
In addition to standard indicators for determining the strength and weakness of currencies, you can consider the cluster tool - the indicator of the strength of currencies Closed cycle FI. Using this indicator and cluster analysis, a trader will be able to determine and calculate the strength of the currency he needs in relation to other assets.
This tool is based on a cluster analysis of forecasting market movements, as well as correlation and other relationships between assets. It calculates a currency index, which is expressed in the number of points for a certain period of time.
The settings of this indicator are quite simple, you need to set only 2 parameters. By default, the instrument sets the H4 timeframe and the number of bars for analysis - 6. Optionally, you can increase the number of bars, as well as the time period, or vice versa, reduce. On the chart, the indicator is displayed in a list, on the left side, and does not interfere with trading at all.
Custom Tool Options
Non-standard solutions for determining the strength of currencies can be attributed to the original versions of indicators. In most cases, all technical tools have the form of a scale, lines or represented by histograms. However, non-standard indicators of the strength of currencies have been developed for trading in the financial markets.
Their characteristics include such characteristics as sound alerts or an unusual type of display of parameters that help visually more clearly determine the weakness and strength of foreign exchange assets. And technical indicators using alerts inform the trader about the parameters necessary for him in sound mode, for example, when a currency pair reaches a certain level or quotation.
Trading Application
These types of indicators, as well as the majority of other instruments, are not used separately in trading, but can be the basis of trading strategies. In most cases, they are used as filters to filter out false signals when opening a position.
Depending on the goals of the trader, according to their indicators, it is possible to analyze the market movement and open orders for market weakness or strength. Suppose if an asset is weak, then the other currency that is paired with it has more power. Therefore, you need to open a position in the direction of a strong asset. For example, if in the “Eurodollar” pair, the American dollar shows weakness, then you need to open an order to increase / increase market quotes.
Finally
Many beginners choose trading strategies that use tools to determine the strength or weakness of the market. Even for professionals, it’s quite difficult to choose and determine which indicator of the strength of currencies is better, since they all have their own characteristics and positive characteristics.
The advantages of such tools include the fact that their indicators are never redrawn, and the disadvantages are lag, which is the scourge and destiny of many technical indicators. Therefore, it is most advisable to use various options of instruments in a trading strategy. Its basis should include graphical constructions, technical indicators, as well as tools for filtering false entry points into the market and opening positions.