Why Relative Strength is Important in Forex?
As forex Traders we are always trying to get an edge in our pursuit of increased profitability. We study the charts and look for those setups that get us really excited. We have our risk management in place, proper position sizing and we have a target, that if met, will generate a nice risk/reward ratio that over time will make a generous amount of pips. We‘re well on our way to a profitable career as a Currency Trader. We’re all set….To get more news about WikiFX, you can visit wikifx official website.
Yes, BUT, I would submit that you forgot one of the most important things to consider before you even look at a chart. The fact that you are pairs traders, implies that you are long one currency and short another currency, hence a currency “pair”. Have you thought about what pair you have picked and why it might not be the BEST pair to trade？
Unless your analysis starts with relative strength and weakness first, you might not be in the most uncorrelated currencies to give you the biggest move based on what you thought was a good setup on a chart.
When you are able to group the JPY pairs together and identify the % change on all 7 pairings, it will give you a snapshot of the strongest and weakness currencies at the present time. You are then able to determine the pair that has the best odds of providing the biggest move when there is the catalyst to provide energy in the pair.
Because every trade is a relative value trade, you can simply look at the % change and can quickly identify the pair that will give you the potential biggest move for a specific currency in play.
For example, if there is news on the USD, what currency would you use to pair against the USD to give you the biggest move if the news is bullish or bearish？ Truth is, it won‘t be the same pair. If it’s a bullish USD, then one of the other 7 currencies will be the weakest and if bearish, one will be the strongest.
By grouping the JPY pairs and identifying the most uncorrelated currencies, you can take your trading to the next level. Yes, you can be profitable without this analysis, but I would submit that it will help move the odds further in your favor and increase your risk/reward ratio.
As Traders every time we can give ourselves a better edge and move the odds in our favor, thats a winning strategy.