How To Determine The Strongest & Weakest Currencies To Trade!

how do you determine the strength of a currency

Do you struggle to find the best pairs to trade and want to know how do you determine the strength of a currency. Understanding what makes a currency strong or weak will give you a trading edge. So if you want to start trading the strongest currencies, then you’re in the right place!

You can determine the strength of a currency with knowing what makes a currency strong or weak. The use of cross currencies to see which currency is stronger overall, which can be applied by creating a currency profile that will show the strength of the currency.

The use of moving averages can be applied to currency profiles, to show the strength or weakness of the base currency. Or the use of a currency heat map may be used to show the strongest to weakest currency.

The way you are going to profit from the markets is with exploiting the strength and weakness of a currency to another. The greater the divergence is between the two currencies the greater the profits you stand to make.

What’s the strongest to the weakest currency is going to be the name of the game, and how you can improve your trading 100%. But to know how do you determine the strength of a currency, and to trade successfully, you will need to have quality buy or sell signals.

This can be achieved when using a solid Forex trading strategy, as within a post I wrote with using a Forex swing trading system to trade with. To learn more on using a swing trading style of trading you can find more by heading over to that article by clicking here.

Without a solid strategy, you may find yourself buying into resistance and selling into support. Without a strategy or a plan in place, you will then drain your trading account faster then you can imagine!

What I’m going to cover in today’s article, to allow you to know how do you determine the strength of a currency pair;

  1. What makes a currency strong or weak?
  2. Using currency crosses to find the strength of a currency
  3. Creating currency profiles to see a currencies strength or weakness
  4. Adding the moving average to speed up your chart time
  5. Best currency strength meter tools

What Makes A Currency Strong Or Weak?

how do you determine the strength of a currency

Forex trading is complicated by it’s self, without needing to understand and know how do you determine the strength of a currency. What actually makes a currency strong or weak there are going to be many variables involved, when determining a currencies strength.

Not only will their be many country specific variables to look at, there will also be the benchmarks against the other currencies as well, which a currency can be measured against!

There are three main factors you will want to consider when you need to know how do you determine the strength of a currency;

  • Interest rates- When a currency has a high interest rate, this will in fact promote the strength of the currency. This will be with foreign investors being able to get a much higher return when investing in that country.
  • Economic policies- Tight fiscal discipline and anti-inflationary monetary policies help promote a strong currency.
  • Stability of a country- It’s going to be know that a strong government with a history of well established economic policies are the type of things that attract investment and thus promote a strong currency.
Stability

With a countries government seeking their currency to have stability, more so than perhaps strength. Is because having a strong currency will tend to then cause a countries exports to become more expensive. But the same could be said for a weak currency, which can also cause the countries exports to become more expensive.

So an ideal solution for a government is to aim to have their currency within the middle when it comes to, how do you determine the strength of a currency.

Valued Higher

A currency is also going to classified as strong when it is worth more than another country’s currency. Put another way, if the US dollar was worth half a pound, the pound would be considerably stronger than the dollar. That would then mean that the US dollar would be considerably weaker than the pound!

This then, also means that it would be easier for someone from the UK to afford to have a holiday within America. Than, what it would be for someone to have a holiday from America to stay in the UK. It also means that products from the UK are going cost dramatically more for an American to purchase, and products from America are obviously going to cost less in the UK.

Safe Havens

This brings me to the safe havens currencies, where you will find some countries have very strong currencies. At a time when the world economy is perhaps weak or politically unstable. These countries are what we call “safe havens” because, that country is viewed as economically and politically stable.

In other words, that countries currency is more likely to recover from any turmoil going on.

The bottom line?

With how do you determine the strength of a currency, a strong currency is going to be good for people who like to travel abroad, and people who like imported products, because those will be cheaper. However, it can be bad for domestic companies.

When a currency is weak, that can become really good for jobs in a country. But it’s bad for people who want to travel abroad or use imported products, with the world getting more and more global, more and more products are imported, so that affects people’s disposable income. Ideally, it’s important to maintain a suitable balance between the two.

Using Currency Crosses To Find The Strength Of A Currency

choosing the right currency
Use Of Currency Crosses

The use of currency crosses to find the strength and weakness of a currency is one of the most overlooked aspects of Forex trading. A cross currency pair is a currency that does not include the USD currency. Some of these pairs for example; EURGBP, EURNZD, GBPAUD and AUDNZD to name a few.

Using cross pairs to find which pair to trade can be used in a few ways. First, lets assume you are looking to trade the AUDUSD pair, and looking to take a long potion. You then check the NZDUSD pair and this has a similar looking setup to the long side.

How do you find the best pair out of the two to trade, with using how do you determine the strength of a currency. This might not seem that obvious to start, but the simple solution is to look at the cross pair of AUDNZD. With determining the direction of the AUDNZD, will show you the strongest currency of the two.

Having this information at hand, will allow you to know which pair of the AUDUSD or NZDUSD to trade. So you see using cross currency to this effect will greatly assist you in know which pair is stronger out of the two to trade in the bullish position.

Don’t Forget To Plan The Trade

Even though the idea is simple to apply, when using cross pairs to determine a currency strength or weakness. You need to also bear in mind the trade setup, that you aren’t trading directly into a level of support or resistance.

You can further your Forex education with reading through another trading lesson I wrote on the difference between support and resistance by clicking here.

If you take a trade using the example as above with the AUDUSD or NZDUSD, and you see that the AUDNZD is bearish showing the NZD as a single currency is stronger. You would expect to take a buy on the NZDUSD pair expecting price to head into your desired direction.

But here’s the thing?

  • Where is resistance?
  • Was there a valid buy signal on the NZDUSD to take a trade?
  • Where is your stop loss?
  • What would negate the setup?
  • Is there any scheduled news event for the Kiwi?

If you fail to answer those questions, then where is your trading plan? Even worse, you just plainly chased the idea of the setup based solely on the cross pair. My point is, even though you can use cross pairs to know how do you determine the strength of a currency.

Taking a trade without the presence of a quality signal or a trading plan in place. You are setting yourself up to fail, in fact if you don’t know how to create your own Forex trading plan. Why not learn exactly how to make your own plan with my recent article I wrote with creating a Forex trading plan by clicking here.

Creating Currency Profiles To See A Currencies Strength Or Weakness!

Setting currency profiles

Another process of finding the strongest and weakest currency, with how do you determine the strength of a currency. Is going to be creating currency profiles within the MT4 platform.

This process is simple to do, and having profiles for each type of currency will allow you to see at a glance which currency is the strongest.

How do I create these profiles?

In MT4 platform, it is very simple to create a profile. All you need to do is create price charts for all currencies that contain the one base currency. To make this easier for you I have created a chart below to show which cross pars to bunch together.

All you need to do, is to create a chart for each of the cross pairs within the tables below and save as a currency profile. Once you have these all saved, you will then just need to click onto each profile to see each base currency across all other pairs at a glance.

USDEURGBPAUD
USDCHFEURUSDGBPUSDAUDUSD
USDCADEURCHFGBPCHFAUDCHF
USDJPYEURGBPEURGBPAUDJPY
EURUSDEURJPYGBPJPYAUDCAD
GBPUSDEURAUDGBPAUDAUDNZD
AUDUSDEURNZDGBPNZDEURAUD
NZDUSDEURCADGBPCADGBPAUD
NZDCHFCADJPY
NZDUSDUSDCHFUSDCADUSDJPY
NZDCHFCHFJPYCADJPYEURJPY
NZDJPYCADCHFCADCHFGBPJPY
NZDCADEURCHFEURCADAUDJPY
AUDNZDGBPCHFGBPCADNZDJPY
EURNZDAUDCHFAUDCADCHFJPY
GBPNZDNZDCHFNZDCADCADJPY

Using a currency profile will speed up your chart time, with how do you determine the strength of a currency. With when you now open up the currency profile, you will look over all charts and see with a quick glance if the currency is strong, weak or neither.

To show you a example of how this would look, when using the EUR as the base currency. See the image below,

EUR_profile

From the image above you will see the overall currency strength is bearish. With the five pairs all showing bearish price movement. One pair has bullish price movement and one pair sideways. From this information with a glance will give you an overall view on the strength of the EUR as a single currency.

Of course, there is going to be more to it then just looking at the overall price movement. With when taking a trade as I mentioned above using a solid signal for an entry. Using the profile will give you a starting point for an overall direction you would be looking to trade the EUR!

All that is needed now, is a good Forex strategy to use with the currency profiles. In fact, I have a great article I wrote recently all about how you create your own Forex strategy. To find out more how you can get started today, just click here.

Adding The Moving Average To Speed Up Your Chart Time

Trading With The Trend in a Forex trading strategy

Another great tool you can add, when looking to find how do you determine the strength of a currency. Is with using an moving average, with adding a moving average to the price chart of a pair. Will also allow you to see the overall trend of a currency pair with a quick glance.

Therefore, reducing the chart time needed when searching for any trade setups!

Using this in conjunction with the currency profiles, will now allow you to check each profile seeing where price sits within the moving average. So if price trades above the moving average, that pair will be classed as being in a bullish trend.

Using the profile image above, if price was below the moving average you use to see the trend direction. With all cross pairs, then the EUR as a single currency would be weak. Allowing you to quickly determine the strength of the EUR.

An example of a price chart with using the 100 ema as the trend direction. When price trades below this 100 ema, then you will see the pair as in a down trend and being weak. All you then need to do is use your Forex strategy to trade this with the currency profiles.

Forex trading strategy using the 100 EMA

A perfect Forex trading strategy, is going to be a strategy that allows you to catch trades with the trend. With now using what you have learnt with how do you determine the strength of a currency.

If you are still looking for a Forex strategy, then you really need to check out my perfect Forex trading strategy using the moving average. It’s totally free and you could start making profits with it today. To go and read all about this strategy, just head over to another article I have written all about a perfect Forex strategy by clicking here.

Best Currency Strength Meter Tools

curency_heat_map

There are also ways you can automate the process with how do you determine the strength of a currency?

You will find some free tools, and some paid tools that will show a currencies strength or weaknesses. Of course, you now have the knowledge with being able to find these strengths and weaknesses yourself with using the currency profiles and cross currencies.

But, if you would rather have a tool that will automatically show this information for you. I have a great free currency heat map that I recommend, which you can access right away. This currency strength heat map indicator is provided by myfxbook and can be found by heading over to my members site by clicking here.

Wrapping Things Up

Now you know how do you determine the strength of a currency, you have a few different techniques you can use to assist you in finding the strongest or weakest currency to trade.

I covered what you need to know when it comes to what makes a currency strong or weak. With the interest rates, economic policies and the stability of a country. Using cross currencies will give you the ability to find a strength of a currency.

But don’t forget you need to plan the trade, don’t go blindly taking a entry based of cross currency information. And also look to trade with a quality signal using a solid Forex trading strategy!

I went through how using currency profiles will assist you in seeing a base currencies strength or weakness. I covered how to create these profiles and save them on the MT4 platform, so you can view them at a quick glance. Don’t forget the table chart that outlines all the currency pairs you need to use for each profile.

This will make setting the profiles up a breeze!

Adding the moving average to the price charts within your currency profiles, will allow you to see the trend direction and overall strength of a currency pair at a quick glance. Finally, you also have the option of automating the whole process for you lazy traders out their. With using the currency heat map indicator to see each currencies strength or weakness.

For more trading articles just click here.

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