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Buy the Strongest, Sell the Weakest.

By Thomas Long, Course Instructor
14 January 2011 14:46 GMT

One important tool FX traders can use in their analysis is the concept of relative strength. I'm not referring to the technical indicator RSI, but rather a comparison of the currencies to determine the strongest currency and the weakest currency. Once we identify those currencies, we can match them up and check the pair that includes both currencies and we should see a strong trending market ("2 Ways to Trade a Strong Trend").

Here are six 4-hour charts of different EUR pairs. The first thing we should notice is that the EUR has been moving up against all of these currencies for almost a week now. Short-term traders have many possibilities when looking for buys in that the EUR has been strong across the board. There is one exception though, the EUR has struggled against the GBP when compared with the other pairs. While those short-term traders might avoid buying the EUR/GBP, longer-term traders might find that information valuable too. Since the longer-term trend of the EUR has been down, some traders are looking for the EUR to reverse back to the downside. Noting how strong the GBP has been against the EUR on this move up could very well lead to a stronger move down if these markets do reverse. That might mean that selling the EUR/GBP on a reversal could offer a better chance of success than selling any other EUR pair.

Simple comparison between currencies can be done quite easily in the FX markets because of the match up of each currency with another in the pairs we can trade at FXCM. This is an edge to trading FX and is a valuable tool for FX traders.

Buy_the_Strongest_body_76209d1295016058-trend-day-buy-strongest.png, Buy the Strongest, Sell the Weakest.

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14 January 2011 14:46 GMT