The Advantages of Using the Real Currency Strength Meter
There are a number of advantages of using a currency strength indicator that include its usefulness as both long-term and short-term measures, its simplicity, elimination of double exposure of currency pairs, the ability to exclude potentially high-risk trades, and many more.
Short-term features of currency strength indicator
A professional approach is to use forex strength meters as short-term indicators. They are used as a fast reference to which currencies are performing, and are considered as a snapshot of real-time strength that can be used for immediate decisions to buy, sell, or hold a certain currency pair (or in some cases to confirm signals from any other indicators).
The simplicity of Currency strength meters
One of the main advantages of strength meters is the simplicity of their interpretation. This is certainly important for the new traders that do not have enough experience because it is just needed to have a look at a visual representation and note which of the currencies are performing good or bad. There are no ambiguous signals given by this tool so the evaluation is pretty straightforward.
Figure 2. GBPUSD M30 chart with Currency Strength Indicator
Strength meter eliminates double exposure
It is a well-known fact that various assets including currencies that have a high correlation with each other move in the same or in a very similar direction. Due to this reason, having multiple positions opened at the same time with currency pairs that are correlated is highly not recommended, because you are in fact doubling the exact same trade. If the market goes against you this will lead to increasing the accepted risk. For example, if there are opened long positions on USDJPY, USDCHF, and short on EURUSD, a trader triples his exposure because these pairs are correlated.
Moreover, these positions bring additional exposure to EUR and CHF, which can be also harmful to a trader, because they are also correlated and therefore the movement against the desired direction can turn into a disaster. With a Currency strength meter, you can see immediately which currencies are moving simultaneously, and that will allow avoiding making such risky trades.
Currency strength meter shows high-risk trades
Before taking a trade it is important to overview movements of different currencies, and if they are going in the same direction it is a signal of potentially risky trade. For example, if we are opening a long position on EURJPY and CHFJPY, while both of them are correlated pairs, it is a signal of additional risk for the case if one of the above-mentioned currencies is strong.
Another thing that might occur is when one of the pairs is showing a powerful movement, while the other pair is being in a range that could be treated as a signal to pass such trading opportunities. For example, if the AUD/USD is in a downtrend, while the NZD/USD is in a range, long trades should be avoided on NZD/USD, because it implies a risk of downwards movement due to the potential strength of the USD.