How to use the currency strength indicator MT4
When it comes to forex trading, traders typically tend to make use of one of the default indicators that are available on their trading platforms.
Table Of Contents:
- How to use the currency strength indicator MT4
There are many trading strategies that basically make use of the indicators in order to generate buy and sell signals. The profitability of these trading strategies based on the indicators can vary depending on a number of factors.
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For forex traders, the main purpose of using a trading strategy is basically to identify potential trading set ups. While there are many trading strategies that are available, the common underlying factor is that traders prefer to take high probability set ups.
The advantage of trading a high probability set up is that it increases the chances of the trade ending up as a winning trade and generating returns for the trader.
However, when you are trading the markets in real time, it is a different story. Not all trades that you take can result in a winning trade. Traders tend to blame the failure of the trades on their trading strategies.
But the truth is that when it comes to trading, there are a lot of variables involved. In some cases, a trade that looks like a good set up can fail simply because of market conditions. The markets are irrational, to say at the very least.
Therefore, a question that often comes to trader’s mind is whether the trading opportunity that is presented to them can be relied upon or not. This is where the probability factor comes in.
But this can also bring the next question which is how to identify high probability set ups?
There are many different ways to do this. The long and hard way is basically to spend years trading with a single trading strategy to the point that you are familiar and know when the conditions are just right which can lead to a high probability set up.
Alternately, you can make use of an indicator that can complement your trading strategy and thus raise the odds of your trading strategy. In this method, you can simply wait for an additional confirmation and trade your set ups.
This will not only increase the probability of your traders but it can also lead to a more advanced way of trading.
The currency strength indicator for MT4
The currency strength indicator MT4 is a custom indicator that is designed indicate just as the name suggests, the strength of a currency. The currency strength indicator MT4 is designed for use on the MT4 trading platform.
The indicator is based on the fact that currency pairs are made up of two individual currencies. By taking into account all the combinations of the currency pairs and determining the direction, one can estimate the strength of a currency.
When a currency is strong or weak, you can generate profitable trades in real time over the period when the strength or the weakness of the currency prevails.
The advantage of using this indicator is that it can point you to high probability set ups. When you that a certain currency is strong and another currency is weak, you could simply head to that currency pair and apply your trading strategy.
When the conditions are right and you see the right signal that is generated and one that is validated by the currency strength indicator, you can trade such set ups with more confidence.
To illustrate this, let’s take a simple example of a moving average crossover strategy.
Just about every trader would know that when the short term moving average crosses over a long term moving average a buy signal is generated. Likewise, when the short term moving average crosses below a long term moving average a sell signal is generated.
But here’s the catch!
If you have tried to trade with this simple strategy, chances are that you will find that in some market conditions, you can expect price to move back or reverse and move higher, leading to losses on your trades.
How can you improve this?
Take a look at the example below. The EURUSD market is currently trading flat. While the trend looks strong, we know that the medium to long term trend has been flat. While there are some trading opportunities, the fact remains that the market is flat and this could expose the trader to risk.
What you can potentially make in profits could be easily given away the next day.
The moving averages don’t really tell you this. They only react to the price as and when it evolves.
The question is, would you be able to make more money when the markets are ranging or would you make more money when the markets are trending?
How about using the additional factor of determining the currency strength?
When you use the currency strength indicator for MT4, you are powered by the fact that you know whether the currencies are strong or weak. This can in turn help you to fine tune your technical analysis and thus improve your existing trading strategy.
The currency strength indicator is ideal if you are a trend trader. Matter of fact, traders prefer to trade the trending markets rather than trade when the price is trading flat.
More profits are made when trends are the strongest.
Below is a screenshot of the currency strength indicator MT4 which you can easily install on your MT4 trading platform.
The currency strength indicator is very simple as show in the picture above.
Depending on how strong or weak a currency is, the bars light up. The strongest currencies are shown with all the lights light up to green, while the weakest currencies are shown in red.
Using this indicator, you don’t just have to rely on other technical indicators but you can rely on chart patterns or candlestick patterns as well.
What can you deduce from looking at just the above screenshot? It tells you that the strongest currencies are CHF, CAD, AUD, NZD, NOK, SEK, TRY, MXN, ZAR and the weakest currencies are the EUR, USD, JPY.
If you closely observe the above screenshot, you can also see the values that are given for each currency.
From the above, you can see that the strongest currencies and the weakest currencies as well as those that are moderate.
The table below puts the screenshot into perspective.
The above table outlines what you just saw on the screenshot. From the above, we can deduce that trading the following currency pairs can given the best results.
USDSEK, USDMXN, USDZAR, USDTRY, EURTRY, EURAUD – Short positions
Armed with the above knowledge, the next step is that you can apply your favorite trading strategy and take the trading signals that you get.
Simply moving average indicator using the currency strength indicator MT4
The above chart shows an intraday set up for the EURAUD. We make use of a long term and a short term moving average. You can see that based on the strength of the EUR and the AUD currency pair, we can simply take a short position knowing that the strength of one currency pair is at the extreme, while the strength of the other currency pair is the weakest.
With a regular trading set up, it can be difficult to spot the high probability set ups. For example, going back to the first screenshot and the table, we know that the strengths of JPY and GBP are just moderate.
You can avoid trading these currency pairs or trading any currency pair that uses one of these two currencies.
Below is an example of GBPJPY which are not the strongest of currency pairs. You can see based on the candlestick’s wicks that there is a bit of volatility for this currency pair.
The currency strength indicator for MT4 is updated in real time and it can tell you the strength of the currency as and when it evolves. This can give you a good idea into understanding what currency pairs to trade and to avoid.
To put it in simple terms, using the currency strength indicator you can easily catch trending pairs to trade rather than get caught up with currency pairs that are trading sideways.
Now that you we have an understanding of the currency strength indicator for MT4, let’s look at some more details and how this indicator can be very beneficial for you.
How does the currency strength indicator compare against indicators?
One of the commonly asked questions about the currency strength indicator by traders when the come across this is how it compares against indicators.
Asking this question is like asking how apples compare to oranges. Indicators are basically designed based on price. For example, a moving average indicator is based on the average price of the security that you analyze.
Whereas, a currency strength indicator takes into account the price of all the currency pairs and then determines the strongest and the weakest currency pairs. As you can see, the traditional indicators that you are known to use is very different compared to the currency strength indicator.
Secondly, traders often tend to mix up the regular indicators with the currency strength indicator. The fact that your traditional indicators such as the Stochastics oscillator or the RSI or other indicators or tools such as the Pitchfork or Fibonacci retracements deal with the price in question.
Using these indicators, you can predict where price is most likely to retrace or reverse. Based on this information and the indicators that you use, you can determine whether you want to enter long or short in the market.
Using the currency strength indicator on the other hand gives you additional knowledge or information about the markets. When you trade a currency pair in isolation, there is no way of knowing whether the trend will last.
In order to determine if the currencies from the currency pair that you are trading are indeed strong or not, you would have to analyze almost all currency pairs that are offered by your forex broker to derive at the result.
The currency strength indicator for MT4 does all the hard work for you and presents in a very easy to understand way which of the currencies are the strongest and the weakest and can therefore point you to the right direction.
The currency strength indicator for MT4 is similar to a forex currency pair scanner. Looking at the strongest and weakest currency pair you can easily filter out the currencies that exhibit the strongest trends and you can trade these alone.
Types of currency strength indicators
Before we get into the details, it is important to know that there are two types of currency strength indicators. These are broadly categorized into real time and cyclical indicators.
Real time currency strength indicator
A real time currency strength indicator is one that shows you the current prevailing market conditions. With a real time currency strength indicator, the strength or the weakness of a currency can change over time.
Sometimes, some unexpected news events could potentially have the ability to reverse the direction of a currency. In such circumstances, a real time currency strength indicator can show you as and when a currency is strengthening or weakening.
Cyclical currency strength indicators
A cyclical currency strength indicator on the other hand shows the overall picture of the strength or the weakness of the currency in question. It takes more time for a cyclical currency strength indicator to adjust to the existing market conditions.
On the other hand, the cyclical currency strength indicators are more smooth, but they will not point you out to any potential corrections or short term reversals of the currency in question.
The currency strength indicator that we present here is a real time currency strength indicator. This indicator automatically adjusts to the momentum of the currency in question. Thus, it allows you react quickly to changing market conditions.
The currency strength indicator for MT4 is an ideal tool if you are day trading as this can give you strong trading opportunities especially when you combine this indicator with a trading strategy that you are familiar with.
The currency strength indicator for MT4 basically covers 13 currencies for this. This gives traders a lot of trading opportunities given the number of currency pairs that you can trade. The indicator is only limited by the currencies that your broker allows you to trade.
The indicator is a bit more advanced that the regular indicators such as the Average Directional Index indicator or the ADX. It can help you catch the right trends in the market.
Traders can have a choice to either swing trade their positions, which will mean keeping a close eye on the currency strength indicator for MT4 or to day trade their positions and capture the profits from the most highly probable currency pairs in questions.
Advantages of the currency strength indicator MT4
There are quite a few advantages of using the currency strength indicator for MT4. Firstly, it eliminates the double exposure. Traders often tend to make use of correlations in their trading which lead to a lot of exposure in the markets.
Different currency pairs behave differently. Thus, when you are exposed more to a currency pair through correlation, it can create more risk. With the currency strength indicator for MT4 you can avoid this and focus simply on the most trending currency pairs.
Secondly, you don’t have to hedge when you are using the currency strength indicator. This is closely tied to the first aspect of correlation based trading. Opening multiple positions and those in different directions due to factors such as inverse correlations can lead to a lot of confusion.
Thirdly, the currency strength indicator can allow you to focus on high probability set ups based on the strength of the currencies in question. However, there is a small drawback which is that the currency strength indicator is not suited for counter-trend trading.
But given the risks that comes from counter trend trading, the currency strength indicator can keep you on the safe track.
Currency Strength Indicator MT4 – Conclusion
In summary, the currency strength indicator for MT4 measures the strength of a currency based on all the currencies that are available with your forex broker over the last 24-hour period. It then applies a logical calculation and assigns individual strength to each currency and presents the information in an easy to understand way.
The currency strength indicator is not an indicator that should be used in isolation. Rather, this indicator can complement your existing trading strategies and will help you to pick the right combination of the currency pair to strength.
The bottom-line result is that your trading strategy is automatically improved as the indicator allows you capture the strong moves in the market.
