The following formula is used to calculate the percentage change for a currency pair:
Some products may produce data that goes against the original definition of currency strength. Some users apply smoothing filters, including moving averages, while others use other filters (e.g. RSI (MACD). If traders add filters to the indicator of currency strength, they might get false trading signals. They could also be tempted to make poor trades, which can lead them into a losing streak.
This is especially important if you trade the markets in a shorter timeframe. You may get a false sense of the strength or weakness if you have a gap-open on Monday. It is therefore important to visual check what the currency strength meters are telling you about a currency's strength.
If GBPUSD is correlated with EURGBP at -91 this would indicate that they have an negative correlation. The pair will move in opposite directions and so long trades or short trades on these two pairs would likely cancel each others.
It is up to you to decide how to make use of these tools. Most traders use the strength gauge alongside an existing strategy to trade in the same direction that the market's underlying strength.
The best way to gauge currency strength is through currency correlation. If a Forex correlation matrix has not been compiled using the most up-to-date technologies, it will be unlikely to cause any problems.
There are several important events that you should keep in mind as we enter another week. These are, as usual,...
Forex strength meters over the years have developed into currency correlation matters that provide more detailed and precise information. Forex correlation, as with other correlations signal correlation between two currencies.
Today's biggest Forex move has been made by the New Zealand Dollar. The New Zealand Dollar is making a comeback.
Our currency strength meter gives you a quick visual guide to which currencies are currently strong, and which ones are weak. The meter measures the strength of all forex cross pairs and applies calculations on them to determine the overall strength for each individual currency. Please see notes below for further details.
This calculation is performed across 28 Forex pairs in each of the four time frames. The pairs are then combined to calculate the underlying strength for a currency.
There are a range of advantages to using a currency correlation matrix as a Forex strength indicator, including its simplicity, it's usefulness as a short-term indicator, the ability to eliminate double exposure and unnecessary hedging, the ability to signal high-risk trades, and the fact that it's available for free.
* When the USD is the pair quote, we invert negative or positive values. Base pairs remain the same.
In financial terms, "correlation" refers to the numerical measure of a relationship between two variables (in this example, Forex pairs). The range between -1 and +1 is the range of correlation coefficients. A correlation of +1 indicates that the flow of two currencies in the same direction will occur. A correlation value of -1 is an indication that two currency pair will move in the same direction 100% of their time. A correlation value of zero is an indication that the relationship between currencies pairs is completely unresolved.