The idea is to trade the strength and weakness of currencies and make profits. But some traders do not believe this idea can be profitable. And if it works, why and how does it work? In this article, we explain the main factors that affect the strength of currencies and give you a deeper insight into the evaluation of the currency strength meter and the idea behind it.
In general, there are trends in the financial markets. Trends are created by a continuous demand for currencies. This demand is triggered by certain factors (long or short term).
The first factor is the inflation rate in the country where the currency is traded. Normally, a high inflation rate makes the currency weaker and a low inflation rate makes the currency relatively strong.
A high interest rate is good for the currency because when you own it, you get more interest. If a country has high inflation and a high interest rate, it makes sense to watch the real interest rate (nominal interest rate minus inflation rate).
Monetary policy of the central bank
It is good to also monitor the side and pace of the interest rate. For example, if a central bank is about to increase the interest rate, it is good for the strength of that currency as the future increase in the interest rate will further increase the power of the currency.
Cash money flow
Another important factor in the demand and supply of certain currencies is the real inflows or outflows from the country's currency. If the country achieves a stable positive excess of exports over imports, this leads to an inflow of funds into the country and increases the strength of the currency. Conversely, the outflow decreases the value of the currency. A special case is when a particular country has a strong tourism sector. This sector generally generates an inflow of money domestically.
Central bank reserves
When the country's central bank issues money to maintain the current value of the country's currency, the amount of foreign reserves decreases. This is bad for the currency and at a certain point of time, the power of the currency will decrease and it will lose its strength.
Since the factors can produce different signals and moreover, you always need to observe the ratio of two currencies, it is necessary to observe something with a numerical value. Our currency strength meter gives you the opportunity to trade the strength and weakness of currencies.
You don't have to open a trade every day
Beginners tend to think that professional traders open their trades every day. But that's not true. Professional traders wait for good trading opportunities and only then enter the market.
Some days good trading opportunities won't happen. Some days the volatility will be too low, and you won't make a more or less decent profit. On the contrary, the volatility will be too high, and you will not be able to open your trades safely. There can be many different reasons in the market when it is best to refrain from trading.
Experienced traders know when it is a good idea to sit back and wait. At the same time, most beginning traders constantly open new positions because they think they should trade. But they end up making bad trades and continuously losing money. A forex market is a place where the money of the impatient goes into the pocket of the patient.
If you don't find valid good entry points but still open new trades, you will lose a lot more money than if you were patient and stayed out of the market. The number one rule in trading is don't lose money, and this is where the currency strength meter can help.