Forex currency strength indicator explained

Currency strength indicator - 5 min

Currency strength indicator – 5 min

Question

Hi Anna, Firstly, I just wanted to say I’ve just finished “Forex For Beginners” and I thoroughly enjoyed the book; found if extremely helpful and useful. Opened my first forex account on Friday of last week. Made some mistakes at first, lacked the discipline to follow my strategy, I think I was a tad over keen to trade at first. I’ve just purchased “A Complete Guide to VPA” so I’ll start on that tonight. I have a quick question though if you wouldn’t mind answering. In Forex for Beginners, you use the Currency Strength Indicator to look for potential indicators of an upcoming reversal. And then from this you use the currency matrix and analysis to confirm the reversal. I was just wondering, if you could use the same strategy to indicate a continuing trend? If this is explained in the book I’ve just purchased I apologise, I just thought I’d ask.

For example, if both the Aus and Usd are sitting at the mid level on the CSI, ie none are overbought or over sold, however the price volume chart is showing high volume and wide candles in a certain direction, say upwards, could this signify a continuing trend in this direction ? If this was coupled with observing different time frames on the CSI which shows that the Aus was previously over sold and the Usd was overbought? Finally, I’d just like to thank you for your books, I’ve been trying to find valuable, informative forex information for a while now, and it’s been frustrating but I feel I’ve now finally made progress.

Answer

Many thanks for your email and for your kind words which are much appreciated. It’s always a pleasure to hear from readers of my books and I hope they go some way to helping you achieve your trading ambitions. With regard to your question about the currency strength indicator and how it reflects price behaviour in the forex market, and in particular when the lines are mid way between over bought and oversold. As a general principle when the lines are relatively flat then typically this will signal price action that is in a congestion phase for one of three reasons.

First, the market is waiting for an impending news release and is therefore quiet. Second, it could be a period when there is little news to drive the market, and third when markets are transitioning from one financial centre to another, and perhaps to a less liquid session. In terms of the volume price relationship, and hence the relationship to the lines on the indicator, it is very unlikely you would see high volume or wide spread candles in these phases. Indeed, congestion phases are characterized by narrow spreads and low or very low volume. By contrast when price is moving firmly higher or lower, the lines will be at a sharp angle, reflecting the increase in market momentum, driven by both volume and price. And, as you will read in the books a currency’s journey towards overbought or oversold will always be reflected in multiple time frames.

Finally, it is also important to note that when the lines are meandering in the middle, it could simply signal a pause in the longer term trend and is not necessarily indicative of a reversal. I hope the above helps and thank you again for taking the time to write to me and you can find further details on the currency strength indicator here.

Kind regards Anna

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