Having the ability to assess the strength or weakness of the two currencies you trade can be extremely beneficial in many ways. If you are trading the USDJPY and both currencies are equally strong then you’re looking at a sideways market. If the dollar is strong and the Yen is weak then the USDJPY will rally. Having an idea of how strong or weak the two currencies are in relation to each other can be very useful for e.g. entries and trade management. This is a very interesting topic and one I wish to discuss in this post.

Currency strength as a utility

If the perfect technical trade sets up and you decide to sell the USDJPY, would you take the trade if you knew that the dollar was accumulating strength in relation to the Yen? Likely not. Having access to this information can be very useful and help one assess the validity of the trade prior to opening a position. As an experiment, I wrote a currency strength indicator for the MT4 platform and I started to pay attention to it each time a trade was qualified to see if the information provided by the indicator was useful or not. After only a few days, I found myself entering fewer trades, trades that often ended up turning into losers. When I manage trades I do nothing else and using the strength calculations provided by the indicator often told me when it was time of exit a position and this is how I currently use the indicator.

Currency strength MT4 indicator

The currency strength MT4 indicator calculates strength readings on the following currencies:

  1. EUR
  2. USD
  3. GBP
  4. CHF
  5. CAD
  6. JPY
  7. AUD
  8. NZD

The indicator presents me with a table, which includes multiple periods, and if configured to do so, multiple look-back periods. A look-back period is a user defined number of periods that the indicator will use to compare current price data with. As an example, if the look back period is set to 5, and the time frame is the hourly chart, the indicator will compare current price with the price of the pair, 5 hours ago. This calculation is performed on all possible crosses of all 8 currencies combined, 28 in total, which enables the indicator to order the strength of all 8 currencies from strongest to weakest.

Currency strength meter in code

Programmatically, the programming logic might resemble something like the following:

...
string sCurrencies[] = {"EUR","USD","GBP","CHF","CAD","JPY","AUD","NZD"};
string sCrosses[] = {"EURUSD",
                     "GBPUSD",
                     "AUDUSD",
                     "USDJPY",
                     "USDCHF",
                     "USDCAD",
                     "EURAUD",
                     "EURCAD",
                     "EURCHF",
                     "EURGBP",
                     "EURJPY",
                     "GBPJPY",
                     "GBPCHF",
                     "NZDUSD",
                     "AUDCAD",
                     "AUDJPY",
                     "CHFJPY",
                     "AUDNZD",
                     "NZDJPY",
                     "NZDCAD",
                     "NZDCHF",
                     "GBPNZD",
                     "EURNZD",
                     "GBPCAD",
                     "GBPAUD",
                     "AUDCHF",
                     "CADCHF",
                     "CADJPY"};

for (int i=0; i<ArraySize(sCurrencies); i++) {
  ...
  // Look for the currency we wish to calculate the strength of 
  for (int j=0; j<ArraySize(sCrosses); j++) { 
    // Does this pair contain the currency?
    // Is it the base or the cross
    // Calculate the strength
    ...
  }
  // Store the result
  // Order
  ...
}

The result of the calculation is the geometric mean of all currency strengths, which is then displayed graphically in the indicator’s dashboard, a screen-shot of which resembles the following:

using-currency-strength-and-weakness-data-for-high-probability-trades-1

As can be seen, the indicator is in “Scalp” mode, which is one of the following four modes:

  1. Scalp
  2. Day
  3. Swing
  4. Position

The lower the mode (Scalp being the lowest and Position being the highest) the smaller the time frames used by the indicator for the analysis. The beauty of the different modes is that the lower modes enable you to see what’s going on, on the smaller time frames. It enables you to see the early signs of developing strength and/or weakness.

Configuring the MT4 indicator is simple, as there are only a few configuration options. The following screen-shot shows which configuration options are currently available:

using-currency-strength-and-weakness-data-for-high-probability-trades-2

The following is a run-down of the configuration options:

  • Mode: Specifies the mode of the indicator: Scalp (3), Day (2), Swing (1) or Postion (0)
  • PeriodsToShow: The number of timeframes to show in the dashboard (Maximum is 6 timeframes)
  • Lookback: Historical price (e.g. price 5 hours ago) that is used for comparison with current price.
  • AutoMode: If set to True, the indicator will only show the strength information for the currently active chart period.
  • DashboardTextColour: Colour of the dashboard for varying chart background colours

Using the Pipnotic Currency Strength MT4 Indicator

Using the currency indicator is easy and as I mentioned previously, I use it mostly for trade management; when do I need to exit trades. My entries are normally taken at historically respected levels, which I expect to hold so even when the strength or e.g. the USD is greater than the strength of the JPY, I expect this to change when price reaches one of my levels. So I actually try not to pay too much attention to the indicator for my entries unless something out of the ordinary is going on. Where the indicator really shines is when my e.g. short order has been filled to sell USDJPY, I will keep my eye on the strength of the USD and JPY in relation to each other to help me identify areas where I should consider exiting a trade. Obviously I’m watching price nodules as potential targets or areas to take profits/reduce risk but if price continues to move in my direction, I will often remove my target, trail my stop and watch the strength indicator for when I can expect a pullback. For me, this is an excellent way to assess if a support level will hold or not.

If we have a look at a theoretical example, let’s consider the chart below. Will the level marked off on the chart hold (should I take profit) or will price move through it (reduce risk)? Keeping an eye on the smaller period currency strength readings can give us some clues. Are the strengths increasing? This we can see by viewing the information in parenthesis to the right of the currency – is the number positive or negative? Positive means that it is increasing, negative means that it is decreasing.

using-currency-strength-and-weakness-data-for-high-probability-trades-3

The subtle flashes of increasing/decreasing currency strength at historically respected levels is where the clues are, and this is what I was interested in when I programmed the indicator. All of the qualified and applicable information we are able to observe prior to making a decision, makes the quality of our decision increase – and it was the purpose of this research project to help me increase the quality of my trade management decisions.

Conclusion

When I trade, I look almost exclusively at historically respected levels of support and resistance, and supply and demand levels. This is what I have always done and this is what I will continue to do. Something that was new to me when I began writing the Pipnotic Currency Strength MT4 Indicator was the use of currency strength indicators when making trading decisions. I have discovered the information currency strength indicators are able to bring to the attention of the trader to be very interesting and useful, especially in relation to trade management and I will continue to harness this information in the future.

Thank you.