If you're a trader, I'm sure you're familiar with fundamental trading, technical trading, trend trading, candlestick trading, swing trading and all the other varieties of trading styles that riddle the markets these days. Each one professes to be "the way," but in reality, none of them really are.
The only constant I've found in trading any of the markets I trade, especially forex, is that strength is the only factor that drives prices especially in the short term. And since I am a short term trader, this is the only time frame I'm interested in. Strength is a direct indicator of supply vs. demand, and is therefore more of a fundamental indicator than a technical indicator.
However, for some bewildering reason, short term traders have chosen technical analysis as their method of choice. You've probably noticed that every charting website or charting software package includes a long list of technical indicators free of charge. I believe that the reason they're free is because you get what you pay for. These indicators are really good for nothing other than predicting the past.
So, what is strength and how do you determine what's strong and what's weak in the forex market at any given time? You may think that the Relative Strength Index (RSI) is a technical indicator that reflects strength. It's really not though.
By definition, the RSI is an indicator that tells us if a currency pair is overbought or oversold. However, just because a currency pair is oversold does not mean that the price of that pair is going to move up in the near future. Conversely, just because a currency pair is overbought does not mean its price will move down in the near future.
The price of the currency pair may be in this manner, but there is no fundamental reason for this to occur and is therefore not a dependable tool to use in making sound, profitable trading decisions. The reason that the price of a currency pair will move (in every instance) is when there is an imbalance in strength between the 2 individual treaties in the pair.
For instance, if the EUR and the USD are both strong with respect to all the other currencies they trade in pairs with, but there is no imbalance of strength between the EUR and the USD, the price of the EUR / USD pair will not tend to move regardless of the RSI reading at the time, and regardless of how overbought or oversold the pair may be.
So, essentially, the most important piece of information needed to successfully trade a currency pair is how strong each individual currency is compared to the other currencies it trades in pairs with. This information will allow us to match a strong currency with a weak currency, and so select the best currency pair to trade at the time we are trading. There is no free conventional technical indicator I know of that delivers this information.
There is, however, a very unique tool that does deliver this information clearly, on one screen, and in real time. It's a currency meter that utilizes a real-time data feed to measure the buying and selling activity of each major currency tick-by-tick. A calculation is made using this input and the strength of each currency is displayed graphically on a chart where higher values on the vertical axis indicate strong buying activity for an individual currency, and lower values on the axis indicate strong selling activity.
At one glance, it is easy to match a strong currency with a weak currency using this tool. By looking for a trade in the currency pair identified by this method, you now have an extremely high probability of capturing a near term, predictable price move for a profitable trade. Another benefit of using this tool is that the real-time data feed that it requires is free.
Since I started using this currency meter and making trades based on the imbalance of strength between 2 currencies, both my earning percentage and trading profits have skyrocketed. Trading without this tool is like driving blindfolded and I can no longer trade confidently without it.