Advanced Stocks & Shares Investing Course
Currency Strength Meter: The Basics
When you're trading the foreign-exchange (forex) market you're dealing with currency "pairs" - you can't buy one currency without selling another for it. For example, if you wan't to buy U.S. dollars (USD), you could sell your British Pounds (GBP) in exchange for those USD's. You are essentially then trading the currency pair GBP/USD "short" - selling the pound, to buy the dollar. This occurs all the time, especially for holiday makers in the U.K. visiting the States.
Forex traders spend their lives trying to work out which direction a currency pair will go - and generally struggle to do so. They try technical currency indicators, oscillators, chart patterns, fibonacci...and none have survived the test of time.
There is a solution to this problem, known as a macro currency strength meter (or currency strength indicator). The good news is, you get the best meter in the Logikfx Academy. The bad news is, not all currency strength meters are built the same, so be careful! There are a lot of currency strength meters online that are purely based on "price action" (the historical price of assets)... and let's be honest, they don't work. Price represents data from the past (backwards looking), meaning currency strength meters, based on price, are useless for forecasting the future - FACT!
This is what makes Logikfx's currency strength meter a cut above the rest: it uses leading economic data & reports alongside proven financial engineering methods. Logikfx's forex meter displays which currencies are strong and which are weak dependant on the strength of the underlying economy - updated real-time. It's the best way to determine what direction future price will go - and the proof is below!
Currency strength meter: What is it?
Now, what exactly is a currency strength meter (currency strength indicator)?
In very simple terms, a currency strength meter is a tool that shows you how strong, or how weak a currency is, or will be in the future. The free currency strength indicators, available elsewhere online, use an aggregate exchange-rate price calculation to determine strength, which as mentioned above, has no predictive power at all. Why? well it's formula is purely based on historical price, so will only tell you what's happened in the past, and not what's happening in the future!
The Logikfx currency strength meter is a lot different to others out there. It's calculated by crawling thousands of economic reports for over 23 different economies and then running them through a clever algorithm to determine currency strength based on future economic growth or contraction. It makes fundamental analysis accessible, and fast for its users.
For example, to calculate the strength of GBP, the Logikfx currency strength meter would consider the most influential leading, co-incident and lagging economic indicators (e.g. building permits). It would then score them individually on their merit for an overall positive or negative impact on the economy (sliding scale) and combine all scores to give an overall strength or weakness reading for the Great British pound. This is done for over 23 currencies automatically to save traders a signficant amount of time, and heavily reduce margin for error!
Source: Logikfx Academy - Macro Currency Strength Meter
How to identify a bad currency strength meter
In this day and age there are many problems with how currency strength meters are calculated. Many of the formula's are very sub-standard and only consider technical price features. If a currency strength meter doesn't have fundamental variables in its formula, the accuracy of its forecasting capability becomes neglible. Generally, forex traders should look for these red flags in currency strength indicators:
Uses only price in its formula
Emphasises importance of correlation
Has no 'proof of worth'
Has poor coding/ development
Now, if you notice that a currency strength meter is using only backward-looking technical features, this is a major red flag. Instead, the best way to measure currency strength is with macro fundamentals. If an economy is growing, and there is more money in circulation (through printing) then overall the value of that currency will fall in the future - simple economic rules that pay off huge if you understand them. The Logikfx currency strength meter does all of that for you.
Advantages of using Logikfx's macro currency strength meter
Logikfx's macro currency strength meter comes with a vast variety of advantages for traders, including it's basis of leading fundamentals, exceptional time-saving, and the ability to use it quickly and effectively.
Based on fundamental macro trading principles
Professional traders are well known for using macro trading to decide on positions in their portfolio (that's in both forex and stock trading). They use formulated macro currency strength meters like these as a quick guide to which currencies, and stocks, are going to appreciate or depreciate in value. They are excellent for determining long-term drivers of future price.
Saves traders thousands of hours on fundamental research
An absolute huge advantage of using a macro currency strength meter is that it saves traders an unquantifiable amount of time, compared to, if they were to do the research by themselves. In fact, it's virtually impossible to do this fast enough, alone, for all tradable economies (over 23). Not only does it save time, but it also gives traders confidence that the strength readings are accurate (eliminates human error), and efficiently allows them to incorporate fundamentals into their trading decisions.
The macro currency strength meter is easy to use
Many traders are surprised at how easy it is to understand, provided how valuable and effective the currency strength meter is. This is especially appealing for newbie traders who are just starting out, providing that extra confidence behind each trading decision. You don't need to be a profressional trader to understand how strong or weak a currency is based on a simple score.
Currency strength shows traders if there is enough 'fuel' to drive the price
Ever wondered how professional traders catch big trends before they happen? The macro currency strength meter enables you to do just that. It tells you, fundamentally, if there is enough strength in an economy to drive an asset's price to trend in one direction or another - there is simply no other tool, meter, or currency strength indicator out there that can do this for both currencies and stocks.
How does the Logikfx currency strength meter work?
Source: Logikfx Academy - Macro Currency Strength Meter
The Logikfx macro currency strength meter above shows a sample of 10 (out of 23) currency scores for the following economies:
United States Dollar (USD)
Great British Pound (GBP)
Japanese Yen (JPY)
New Zealan Dollar (NZD)
Australian Dollar (AUD)
Swizz Franc (CHF)
Canadian Dollar (CAD)
Turkish Lira (TRY)
Mexican Peso (MXN)
The currencies overall strength is divided into 4 areas:
Strong (Green): Large Positive score
Slightly Strong (Lighter Green): Positive score
Slightly Weak (Light Red): Negative score
Weak (Red): Large Negative score
These are then subdivded further into the change of the score from the previous reading:
Strengthening (positive change)
Neutral (no change)
Weakening (negative change)
So, let's take the highlighted example from the snapshot above, United States Dollar (USD) and Euro (EUR). The USD is showing a strong positive score +36, and is strengthening. The EUR is showing a negative score -27, and is weakening.
Your aim, as a trader, is to combine a strong currency with a weak currency and then trade the currency pair in such a way where you can buy the stronger currency whilst simultaneously selling the weaker currency. The reason for this is to maximise tthe potential volatility you can capture i.e. profit! In our example, this means we would look to SHORT the currency pair EURUSD. Why? Well, as simple as it seems, the EUR is weak, and the USD is strong. It's as easy as that.
A relatively simple concept to grasp, with enormous impact on making high quality trading decisions!
Do the currency strength meter scores change?
Yes. As the world is changing, political themes advance, and economic reports are released, the Logikfx currency strength meter scores are constantly calculating the most accurate valuation of a currency. Every Saturday this is updated for LITA traders in the portal, so they can use it real time to get the fastest reading before everyone else in the market. It's their edge!
Logikfx currency strength meter: The Proof
As we mentioned above, there are a lot of currency strength meters online that are purely based on price action... and let's be honest, they don't work. Price represents data from the past, meaning currency strength meters, based on price, are useless for finding profitable trades - FACT! This is what make's Logikfx's currency strength meter a cut above the rest: it uses leading economic data & reports alongside proven financial engineering methods. It then uses that economic data to generate currency strength scores that reflect the magnitude of future strength or weakness of a currency.
For example, if the Euro (EUR) currency is showing a -27 currency strength score, and the swiss franc (CHF) is showing a +36 currency strength score, we would seek to short (sell) the currency pair EURCHF. Why? Well we believe the EUR will lose value and the CHF will gain value, based on fundamental data used in the currency strength calculation. And when we short a currency pair, we're essentially selling the base current (EUR in this example) and simultaneously buying the counter currency (CHF) - which allows us to maximise the amount of money traders make from their trade.
The real question is, how well does it work? Let's check out the results below on some of predictions of the Logikfx currency strength meter:
16 April 2019
EUR = -27
CHF = 36
Prediction = Short
01 February 2020
over +16% gain*
01 March 2019
CHF = 0 (+25)
CZK = -25
Prediction = Long
01 April 2019
over +12% gain*
*Based on a theoretical 2% risk of margin. Please remember, historical performance is not indicative of future performance.
Tips using the Logikfx currency strength meter
The aim of every trader is to minimise the portfolio downside risk, whilst still maintaining a high probability for catching a large upside. Here are our top tips to get the most out of fundamental scores:
Always place your stop loss based on volatility: If you don't consider the average expected movement of price over the time-frame you are trading, it's highly likely your stop-loss will take you out of a trade before it has had a chance to mature! Always calculate the volatilty, and place your stop off of this.
Check if the market is with, or against you: Once you have a good trade idea using the Logikfx currency strength meter, you need to decide if the market is ready for the price to move in that direction. Professional traders use the Commitments of Traders (COT) Report to do this, to call the perfect turning points!
Limit your gross exposure: The number 1 mistake of traders is over leveraging! Control your exposure to the market, keep the borrowing to a minimum, and always preserve your capital. Margin trading has massive potential, but only once it's understood fully.
Finally, as with any tool, meter or indicator, it has its limitations. The Logikfx currency strength meter is only showing you the first step of the macro framework (80% of the framework to be precise) - traders still need to consider filtration and risk management methods. You can learn the complete professional trading system in the Logikfx Academy which includes the Logikfx currency strength meter tech, COTA tech and a masterclass video series to teach how to use it all effectively. See the Logikfx trading system below:
Source: Logikfx Academy - Macro Fundamental Trading Strategy
How to access the Logikfx Macro Currency Strength Meter
The Logikfx Macro Currency Strength Meter is available for a monthly subscription and is accessed in the LITA Portal.
Are you ready to level-up your trading? Subscribe for just £189/month.