Article Summary: Buy the strongest and sell the weakest is a trading tip we discuss frequently in our Forex courses and online webinars. Relative strength analysis shows that the US Dollar has become strong over the past week and the Australian Dollar remains the weakest.
Gauging relative strength of currencies is a common method employed by traders of all skill levels. The analysis is fairly simple and straight forward as previously laid out in “Know the Strong and the Weak Currencies.” The process can take about 15-20 minutes and doesn’t need to happen but once or twice per week.
Last week, we found the US Dollar was a sleeper in the pack as it was starting to move higher up on the strength scale. Also, last week, the Australian Dollar remained relatively weak even though it was drifting higher.
Performing the same analysis this week we find the US Dollar continued to strengthen while the Aussie weakened a bit. The US Dollar now holds the top spot for strength and the Aussie is still the weakest currency when compared in a broad sense against its currency competitors.
Forex Strategy: US Dollar Continues Strong March
| Currency | Up Arrows | Down Arrows | Change From Last Week |
|---|---|---|---|
| USD | 7 | Higher 2 rankings | |
| CHF | 5 | 2 | Same ranking |
| EUR | 5 | 2 | Higher 1 ranking |
| CAD | 4 | 3 | Higher 2 rankings |
| JPY | 3 | 4 | Lower 4 rankings |
| NZD | 2 | 5 | Higher 1 ranking |
| GBP | 1 | 6 | Lower 2 rankings |
| AUD | 7 | Same ranking |
There are 2 other notable moves on the chart.
First, the Japanese Yen has dropped 4 rankings. It is important to note that when performing the technical analysis of comparing the price to the 200 period Simple Moving Average, the EURJPY, CHFJPY, CADJPY, and NZDJPY where all very close to this moving average. Therefore, this next week will be pivotal week for the Yen.
The Yen is technically at a place on the charts where if it were to rally, now would be a time to do so. On the other hand, if the Yen continues to weaken, then it will break support perhaps indicating a trend change.
Also, the Pound was a big mover this past week as it dropped 2 rankings on the scale above. The Bank of England delivered their interest rate outlook on Thursday and the market sold off on relatively dovish guidance. The surprise came as the central bank noted the higher market interest rates may weigh on the economic outlook. As a result, traders sold the GBP against a fairly strong USD. Earlier this morning, we continued to see broad based Pound selling against a basket of currencies.
The trading opportunity is to sell weakness against strength. So we can sell those currencies at the bottom of the scale above while buying those towards the top of the scale. There are several benefits of trend trading including getting bailed out of an imperfect strategy and aligning yourself in the direction of more pips being available.
There are many different ways to achieve the trade…either through trading a strong versus weak currency or by diversifying through a currency basket trade.
Regardless of your trading method, this simple analysis technique will help you identify a relative strong or relative weak currency to trade.
Good luck with your trading!
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education
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