How to analyze currencies?

The bank’s profit in Forex

Most retail traders look at the Forex market in terms of Forex pairs (the EURUSD, the EURJPY or the GBPEUR), but do you know which currency is the strongest or the weakest around the world? This is how the banks look at the Forex market.

Rather than focus on individual currency pairs in Forex, I use an indicator to identify the strongest and weakest currencies. It’s compatible with MetaTrader 4 and there is also install instructions on how you can get started using it.

How great, would it be to have the top Forex trader from one of the major banks in the city, sitting on your shoulder, telling you what you should be buying and what you should be selling? Pretty awesome, right? The chances are that’s not going to happen.

However, what I can do is telling you and show you exactly what the top Forex bank traders are doing.

How to trade currencies?

The first thing when people come into the Forex market is to look at the Forex pairs. A top bank trader, on the other hand, he’s not looking at the pairs, he’s looking at the strength and weakness of individual currencies. And he’s pitching that against the strength and weakness of other currencies.

Generally speaking, we trade 8 major currencies in the Forex market. If you cross-match these eight major currencies against each other, there are 28 different possible currency pairs to trade.

It’s totally logic to be buying the currencies that are strong and selling weak currencies.

For example, if both the pound and the US dollar are strong, why’d be trading the pound against the US dollar? They’re both strong currencies. It makes sense to buy one of these stronger currencies and find a weaker currency. Perhaps the Swiss franc or the yen and then sell that against one of the stronger currencies.

That’s what the big bank traders are doing, and that’s why they’ve got an edge on most retail traders.

The indicator from above it’s going to show you how to tell the difference between the weak and the strong currencies, exactly how the big bank traders are doing it.

How this indicator works?

Each individual line represents an individual currency in a standalone format, and you’ll find the colour-coding down at the left.

For example:

• The green line is the USD
• The blue line is for the EURO
• The purple line is for the Canadian dollar

When you analyze the lines between them, it will tell you if a particular currency is stronger or weaker in relation to other currencies.

On the chart below is clearly that the British pound is a strong currency and it’s going up in value. The weakest currency in the basket of eight currencies is this red currency and based on the colour-code the red currency is the Swiss franc.

That means the strongest currency at the moment is the British pound and the weakest one is the Swiss franc. In this case, you want to be buying the British pound and selling the Swiss franc to put the edge on your side.

At the summary chart, it will show you if the currency is strong or weak on all the different timeframes, from the five minutes to the one day.

A blue box would indicate the currency is strong in that time period and a red box would indicate the currency is weak in that period.

• A currency that’s blue across the board it’s a strong currency across all timeframes.
• A currency that’s red across the board will mean that’s weak across all timeframes.

Let’s look at the price action chart. The British pound represented by the white line, against the red line, the Swiss franc.

When you see a big buying momentum like the one below, it makes total sense to be buying the stronger currency and selling the weaker currency. In our case, if you want to get the edge on your side, you’d want to be buying the pound and selling the Swiss franc against it.

Always trade currencies that are diverging away from each other.

Another way to use the momentum meter is by looking for ranging markets. In the middle of the chart, you’ll see the orange line for the Australian dollar the brown line which is the Japanese yen. These are both hugging each other and they’re not doing too much.

This currency pair trading in a very tight range. The momentum meter will indicate or show you currency pairs that are currently range-trading. If you are a range trader this should really help you.

The markets commentary box is something that I use on a daily basis. I stream several times a day in the ForexSignals.com trading room and I’m trading a strategy called the Propulsion Strategy.

This indicator is giving me a heads up on what currency pairs I should be trading with my strategy. I’m populating this market commentary throughout the trading day, looking for setups, telling you what trades I’m getting into and what I’m seeing in the markets. And you can access this all through the ForexSignals.com trading room.

I hope the light bulb’s gone off for you, you’re now going to see the market in a completely different light. This is the way the big banks are looking at the market. It really gives you an edge in the market that most retail traders don’t even know is out there.

As always if you liked this blog, leave a comment below. Until next time happy trading and good luck! I hope to see you in the Trading Room.