Currency strength

Currency strength shows value of currency.

By economists, it is often calculated as purchasing power.

Influencing Factors

By financial traders it can be as an indicator, depicting many factors to the currency, for example fundamentals, overall economic performance or interest rates.

 Calculating Methods

It can also be calculated from currency relation to other currencies, usually using pre-defined currency basket.

Typical example of this method is the U.S. Dollar Index. The current trend in currency strength indicators is to combine more currency indexes, in order to make Forex movements easily visible.

Currency strength based trading indicators

Currency strength is calculated from the U.S. Dollar Index which is used as a reference for other currency indexes.

The basic idea behind indicators is "to buy strong currency and to sell weak currency".

With this kind of indicators one is able to:

• see the reactions of each currency on moves in correlated instruments (for example CAD/OIL or AUD/GOLD)
• look for a strong trend in one currency
• observe most of the Forex market in one chart

Examples

Typical example of indicators based on currency strength are Relative currency strength and Absolute currency strength. Their combination is called Forex Flow indicator, because one is able to see the whole currency flow across the Forex market.

Signals

One can use Relative currency strength for pattern trading as well, among basic patterns which can be used are:

Cross

Trend-break

Divergence