The idea is to trade the strength and weakness of currencies and get profit. But some of the traders don't believe that this idea can be profitable. And if it works, why and how it works? In this article, we are going to explain the main factors which affect the strength of the currencies and give you a more in-depth look to assess the currency strength meter and the idea behind it.
Generally, there are trends in finical markets. Trends are generated from continuous currency demand. This demand is caused by certain factors (long or short term).
The first factor is the inflation rate in the country of the currency. Normally at other equal things, the high inflation makes the currency weaker and the low inflation rate makes the currency relatively strong.
The high interest rate is good for the currency, as if you own it, you will gain more interest rates. In case one country is with high inflation and high interest rate, it is a good point to monitor the real interest rate (nominal interest rate minus inflation rate).
Monetary policy of the central bank
It is good to monitor also the side and pace of the Interest rate. For example, if one central bank in is the stage of increasing the interest rate, it is good for the strength of this currency, as the future increase the interest rate, will increase the power of the currency further.
Cash money flow
Another important factor for demand and supply for certain currencies is the real inflow or outflow from the country’s currency. If the country generates stable positive overweight of export over import, this generates cash inflow in the country and increases the strength of the currency. In the opposite case, the outflow decreases the value of the currency. A special case is if a certain country has a strong tourism sector. This sector generally generates an inflow of money in the domestic country.
Central bank reserves
If the Central bank of the country spends money in order to keep the current value of the national currency, the size of the reserve of foreign money decrease. This is bad for the currency and at a certain time the power of the currency will decrease and it will reduce its strength.
As the factors can generate different side signals and on top of this you always need to monitor the ratio of two currencies, you need to monitor something with a number value. Our currency strength meter gives you the possibility to trade the strength and the weakness of the 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.