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How to Use Currency Strength Meter to Identify High Probability Trading Setups

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So…

In my earlier posts, you’ve learned why trading indicators, fundamentals news, and signal services hurt your trading results.

Then, we discussed the power of price action trading and what it can do for you.

In case you missed it, here they are…

Why Most Retail Traders Fail and What You Can Do About it

Price Action Trading Secrets

Moving on…

One of the common problems almost all traders face is this…

“There are so many Forex pairs to trade. How do I pick the right one?”

Because you can have two identical trading setups but, one has a higher chance of winning while the other is likely to fail.

So how do you pick the right one to trade?

Well, that’s where a currency strength meter comes into play.

It helps you to identify the strongest/weakest currencies so you can pick the right currency pair to trade (more on this later).

But first, I want you to avoid these common mistakes traders make when using the currency strength meter…

Do you make these mistakes when using a currency strength meter?

Mistake #1: You randomly use a currency strength meter without knowing how it works

Now, a currency strength meter is like any other trading indicator.

There’s a formula behind it to determine the strength/weakness of a currency.

But if you don’t know the formula behind it, how can you trust the result of the currency strength meter?

What if the formula is wrong?

What if the currency strength meter only works on the daily timeframe but you’re unaware of it and you use it on the lower timeframe?

That’s why no matter what tools or indicators you use, you must always know the formula behind it and how it works.

(And later, I’ll teach you how to create your very own currency strength meter so you have the confidence to use it.)

Mistake #2: You use the currency strength meter to time your entries

Now, a mistake many traders make is to blindly trade based on the currency strength meter.

For example:

You identify what’s the strongest currency pair right now and immediately buy, thinking the price will move higher — big mistake.

Here’s why…

A currency strength meter isn’t meant to generate buy/sell signals.

It only tells you which are the strongest/weakest currencies at a point in time.

Let me explain…

According to my currency strength meter right now, CHF is the strongest and AUD is the weakest…

(Don’t worry, I’ll show you how to create it later.)

But if you look at the charts right now, it’s a bad time to short the AUD/CHF …

Why?

Because you’re chasing the markets lower after it has made a big move.

There’s no logical place to set your stop loss and you’ll likely get stopped out on the pullback.

Next…

Mistake #3: The lower timeframe is prone to false signals

Here’s the thing:

Most currency strength meters calculate the change in price (over a fixed period) to determine which currencies are strong or weak.

But this is prone to false signals on the lower timeframe.

Why?

Because high impact news can cause a “spike” in the price which misleads the strength/weakness of a currency pair.

That’s why you want to use a currency strength meter which calculates the change in price on the higher timeframe.

And here’s how you do it…

How to create a currency strength meter that works (and without coding)

All currency strength meters work in a similar manner.

The idea is to calculate the change in price over a given period and then determine which are the strongest/weakest currency pairs.

Of course, you can complicate things by adding formulas, weightages to different timeframes, etc. — and it’ll not make much of a difference (besides confusing yourself).

So, for this currency strength meter, there’s no complicated formulas or any complex algorithm.

Here’s how it works…

  1. Create a list of major currency pairs
  2. Calculate the percentage change over the last 15-weeks (for the major currency pairs)
  3. Rank them from strongest to weakest

Let me explain…

#1. Create a list of major currency pairs

The list includes EUR/USD, GBP/USD, AUD/USD, NZD/USD, JPY/USD, CAD/USD, CHF/USD.

Now you’re probably wondering:

“Why do you use JPY/USD instead of USD/JPY?”

Simple.

You want to standardize USD as your quote currency so you can compare them “apple for apple”.

#2: Calculate the percentage change over the last 15-weeks

Here’s how…

  1. Insert the Rate of Change (ROC) indicator onto the weekly timeframe
  2. Change the settings to 15-period
  3. Do it for all major currency pairs

Here’s how to do it on TradingView:

#3 Rank them from strongest to weakest

Now once you’ve got the values, you want to rank them from the strongest to the weakest.

The currency pair with the highest value would rank at the top, followed by the second, third, fourth, etc.

Here’s how it’ll look like on excel:

Pro Tip:

You can add exotic currency pairs like USD/ZAR, USD/TRY, USD/RUB, etc. so you have more markets to trade.

How to tweak the currency strength meter for your trading strategy

Now, by using the weekly prices to determine strength and weakness, you can avoid false signals from the lower timeframe.

But if you’re a short-term trader, using a 15-week ROC as your currency strength meter is too long.

So, what now?

That’s where you can tweak your currency strength meter for short-term trading.

So here are some guidelines for you:

  • If you trade below the 4-hour timeframe, use 4-week ROC
  • If you trade between the 4-hour and weekly timeframe, use 15-week ROC
  • If you trade above the weekly timeframe, use 30-week ROC

Now at this point:

You know how your currency strength meter works (without any black box algorithm). And you know how to tweak it to your trading style.

So now the question is…

How do you use the currency strength meter for your trading?

Well, that’s what you’ll discover next, so read on…

How to use a currency strength meter and find high probability trading setups

Here’s how…

Use the currency strength meter and pair the strongest currency with the weakest one — so you get a strong trending market.

For example, look at the currency strength meter below:

You can see AUD is the weakest and CHF is the strongest.

And when paired together, you get AUD/CHF which is in a strong downtrend…

But recall:

You don’t want to blindly short a market just because it’s in a strong downtrend. Why?

Because there’s no logical place to set your stop loss and you’ll likely get stopped out on a pullback.

So, what’s the solution?

Read on…

How to time your entry with precision so you can find low risk and high reward trading opportunities

You might spot a market that’s trending strongly but, it’s not the right time to enter yet.

So how do you know when is a good time to enter a trade?

Well, you want to trade from an area of value.

For example:

So, looking back at the AUD/CHF example earlier. Where’s the area of value?

Well, the nearest one would be the 20-Day Moving Average.

This means you want to let the price retrace towards the 20-Day Moving Average first.

Then, you can look for an entry trigger like shooting star, bearish engulfing, to establish a short position.

Here’s what I mean:

Another example…

Let’s assume AUD is the weakest currency and GBP is the strongest.

And the chart looks like this:

So, where’s the area of value?

If you look carefully, you’ll be able to draw an upward Trendline connecting the lows.

This means you want to let the price retrace towards the upward Trendline first.

Then, look for an entry trigger to long this market (like a hammer, bullish engulfing, etc.).

Here’s what I mean…

Does it make sense?

At this point…

You’ve learned how a currency strength meter helps identify the strongest & weakest currencies so you can identify high probability trading setups.

Then, we discussed how to better time your entry using an area of value — so you can minimize your risk and maximize your profits.

Of course, there’s much more you can do if you want to improve your price action trading skill… far more than I can fit into one blog post.

That’s why I’m opening up the doors to my premium training program, The Ultimate Price Action Trader (UPAT).

It opens on April 14th, Tuesday, and it’s perfect for you if you want to learn how to become a consistently profitable trader, without relying on fancy indicators, fundamental news, or black box algorithms.

So if you want to join The UPAT, then keep a lookout for my next email.

For now, here’s what I’d like to know…

Do you see the markets differently with price action?

Leave a comment below and let me know your thoughts…





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