Currency strength
Encyclopedia
Currency strength expresses the value of currency. For economists, it is often calculated as purchasing power
, while for financial traders, it can be described as an indicator, reflecting many factors related to the currency; for example, fundamental data, overall economic performance or interest rates. It can also be calculated from currency in relation to other currencies, usually using a pre-defined currency basket. A 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. For the calculation of these kind of indexes, major currencies
are usually used because they represent up to 90% of the whole forex market volume.
, 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".
If is X/Y currency pair is up trend, you are able to determine whether this happens due to X's strength or Y's weakness.
With these kind of indicators one is able to choose the most valuable pair to trade; 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; and observe most of the forex market in one chart.
and absolute currency strength
. Their combination is called the "Forex Flow indicator", because you are able to see the whole currency flow across the forex market.
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...
, while for financial traders, it can be described as an indicator, reflecting many factors related to the currency; for example, fundamental data, overall economic performance or interest rates. It can also be calculated from currency in relation to other currencies, usually using a pre-defined currency basket. A typical example of this method is the U.S. Dollar Index
U.S. Dollar Index
The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies.It is a weighted geometric mean of the dollar's value compared only with* Euro , 58.6% weight...
. The current trend in currency strength indicators is to combine more currency indexes in order to make forex movements easily visible. For the calculation of these kind of indexes, major currencies
Currency pair
A currency pair is the quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market. The currency that is used as the reference is called the counter currency or quote currency and the currency that is quoted in relation is called the base...
are usually used because they represent up to 90% of the whole forex market volume.
Currency strength based trading indicators
Currency strength is calculated from the U.S. Dollar IndexU.S. Dollar Index
The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies.It is a weighted geometric mean of the dollar's value compared only with* Euro , 58.6% weight...
, 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".
If is X/Y currency pair is up trend, you are able to determine whether this happens due to X's strength or Y's weakness.
With these kind of indicators one is able to choose the most valuable pair to trade; 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; and observe most of the forex market in one chart.
Examples
Typical examples of indicators based on currency strength are relative currency strengthRelative currency strength
The Relative currency strength is a technical indicator used in the technical analysis of forex market. It is intended to chart the current and historical strength or weakness of a currency based on the closing prices of a recent trading period.It's based on Relative Strength Index and...
and absolute currency strength
Absolute currency strength
The Absolute currency strength is a technical indicator used in the technical analysis of forex market.It is intended to chart the current and historical gain or loss of a currency based on the closing prices of a recent trading period.It's based on mathematical decorrelation of 28 cross currency...
. Their combination is called the "Forex Flow indicator", because you are able to see the whole currency flow across the forex market.
See also
- Relative currency strengthRelative currency strengthThe Relative currency strength is a technical indicator used in the technical analysis of forex market. It is intended to chart the current and historical strength or weakness of a currency based on the closing prices of a recent trading period.It's based on Relative Strength Index and...
- Absolute currency strengthAbsolute currency strengthThe Absolute currency strength is a technical indicator used in the technical analysis of forex market.It is intended to chart the current and historical gain or loss of a currency based on the closing prices of a recent trading period.It's based on mathematical decorrelation of 28 cross currency...
- Balance of tradeBalance of tradeThe balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
- Technical analysisTechnical analysisIn finance, technical analysis is security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis incorporate technical analysis, which being an aspect of active management stands...
- Hard currencyHard currencyHard currency , in economics, refers to a globally traded currency that is expected to serve as a reliable and stable store of value...