Currency strength: A technical indicator
Foreign currency trading, Forex, is based on the relationship between the various currencies in the world. Most Forex trading is conducted by banks and financial institutions that exchange one country’s currency for another. Forex trading is conducted in pairs of currencies, referred to as the base and the counter currency: the base currency always appears first, the counter currency second.
The reason that the trade is conducted in pairs of currencies, one currency at the price of the other, is that on one side of the transaction are buyers and on the other side sellers. If we create a fraction in which the numerator is the base currency and the denominator the counter currency, we obtain a ratio between currencies that represents a value; this value is the rate at which each currency pair is traded.
Currency trading: Forex
The added value of the currency strength meter (CSM) lies in its its ability to analyze several currency pairs in real-time and assign a value between 1 and 5 to each of the seven most common currencies in the market at any point in time. A value of 1 represents the least traded, and a value of 5 the most traded currency of the seven. Please note that CSM is a service provided by CNT.
The technical approach
The CSM adopts a technical approach according to which the market exists within the upper and lower limits of a trading band. In other words, the approach is restricted to purely technical analysis that does not follow the fundamental approach, which is based on information and data.
Choosing a currency pair
For example, if we were to choose the extreme currency pair, that is, the most traded currency vs. the least traded one, we could view the relationship between these currencies as it appears in trading: which one is in the numerator and which one in the denominator.
According to this logic, the analogous analysis is as follows:
- If the strong currency is in the numerator and the weak in the denominator:
On the graphic display check in the various intervals whether the rate reached the upper boundary; if yes, the decision is to sell (put option), because the trend is one of decline.
- If the weak currency is the numerator and the strong in the denominator:
On the graphic display check in the various intervals whether the rate reached the lower boundary; if yes, the decision is to buy (call option), because the trend is one of advance.
A common possible failure is that currency strength appears in black-and-white (na), which stands for “not available.”
This error originates in Internet problems of the external service or the access to it, not necessarily related to the user’s location. The solution is to wait until the Internet connection with the databases of the external service is restored.