Currency strength

Currency strength expresses the value of

currency. For economists, it is often
calculated as purchasing power,[1] 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.[2] 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 indexes of this kind, major
currencies are usually used because they
represent up to 90% of the whole forex
market volume.[3]

Currency strength based

trading indicators
Currency strength is calculated from the
U.S. Dollar Index, which is used as a
reference for other currency indexes.[4]

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.[5]

With indicators of this kind 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
strength and absolute currency strength
(percentage). 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 strength
Absolute currency strength
Balance of trade
Technical analysis
Hard currency
Revaluation

References
1. MISES, Ludwig von. The Theory of
Money and Credit . page 97. United States
of America : Yale University Press, 1953.
2. O'KEEFE, Ryan. Making Money in Forex:
Trade Like a Pro Without Giving Up Your
Day Job . page 42 .John Wiley and Sons,
2010
3. Laïdi, Ashraf, Currency Trading and
Intermarket Analysis, ISBN 978-0-470-
22623-0
4. Umarov, Alexey, Creating a Multi-
Currency Indicator, Using a Number of
Intermediate Indicator Buffers
5. Matthews, Kris, How currency strength
indicators reveal which pairs will trend
and deliver profits
External links
Using Currency Correlations To Your
Advantage

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