Learn Forex: Build Your Trading Plan round the Strongest Currencies

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Article Summary: There can be quite a easy formula to differentiating the most powerful and weakest monies. When you have done you could stick to a record for finding positive entrances in direction of the overriding fashion.

Trading in favour of their most powerful money and attempting to sell the weakest may be your bread and butter trade to get fashion lovers and swing traders equally. The sole distinction is that fad traders contain the trades for more and swing traders frequently possess characterized risk to reward entrances. Trend followers intentionally trade these money mismatches due to the fact that they have a tendency to fad more than lots of men and women expect.

To assist you to imagine just what a strong feeble match upward looks on a graph, here’s just a fad as a result of some noteworthy powerful currency trading trading contrary to the weakest money.

Learn Forex: CADJPY homes the most powerful and weakest monies to fad traders’ delight

(Created by Tyler Yell)

To see for yourself what the current strongest and weakest currency pairs are, you need to perform a Strong and Weak Analysis. Once you’ve done that, you can add fractals and the CCI to your chart to find entries or look for breakouts.

Strong Weak Analysis Breakdown

Place a large moving average on a major currency pair, preferably on an hourly chart or larger. We recommend you do this on excel or a piece of paper with the major individual currencies listed out as opposed to the pairs. This will make it easier for you to take the strongest and look for entries against the weakest.

If you’re using a 4 hour chart, as recommended in the original article, then you will place the large moving average and give each currency credit to the strong or weak category either with an up or down arrow or strong / weak checkmarks. So if you’re looking at the EURJPY which is above the 200 day moving average, then you would tally a strong mark for the EUR and a weak mark for the JPY.

As it currently stands in January 2013, the JPY is far and away the weakest across the board thanks to Shinzo Abe promising to weaken the JPY at all costs to bolster the Japanese economy. The two strongest currencies using the 200 period simple moving average on the 4 hour chart is currently the Canadian Dollar and New Zealand Dollar respectively. Identifying the strongest and weakest will also prevent you from trading two strong or two weak currencies against each other’s unreliable patterns.

Learn Forex: NZDCAD Do Not Provide Clear Chart Patterns as the Two Strongest Currencies

Now that we’ve clearly identified the strongest and weakest currency pairs, you now want to pull up the opposing charts to look for entries. Naturally, we always encourage patience in finding the right entry. With your patience honed we can look to entry techniques to buy the strongest currency pair while selling against the weakest.

Strong vs. Weak Entry Methods #1 — Breakouts with Price Channels

Learn Forex: Donchian Channels are utilized for Entries & Stops Based on Price Alone

The first entry method we’ll discuss is the breakout entry method. Breakout entries are a technical strategy to help you to catch a developing trend and avoid some losing trades. The most common tool used to easily spot breakout entries are Donchian Price Channels.

When using price channels, traders will often look to 20 or 55 period highs and buy price breaking through an old high or breaking below and old low as renewed interest carries the pair in the predominant trend. The argument for entering on breakouts as opposed to “buying low” is that price is the only credible indicator and if price is entering new territory then the trader should follow.

Strong vs. Weak Entry Methods #2 — Combining the CCI with Fractal Indicator

Learn Forex: Combining CCI’s with Fractals Help Identify Respected Market Swings

If you’re not a fan of buying new highs and would rather buy pull backs in an uptrend, then I’d recommend you become familiar with fractals and the Commodity Channel Index (CCI) to time entries.

Fractals help pinpoint changes in market behavior. Many traders will base trading decision like stops and entries on hard turns in market behavior and fractals point that out to you. Adding Fractals to your chart will only show you up or down arrows when a recent top or bottom has been made within the last 5 price bars.

To give more depth and meaning to fractals, we can add the CCI. The CCI is an unbound oscillator that helps measure variation from the average price over a specified period.

When you’re trading the strongest currency against the weakest and find a rare spot on the chart where the weakest currency has temporarily strengthened against the strongest currency beyond the average then you can use that to time entries in the trend. In an uptrend, you’re looking for lows on the CCI ideally crossing below and back above -100.

As you can see above, depending on the strength of the trend, you may not see a CCI reading below -100 (oversold) and that is when it’s best to find a bottoming of the indicator paired with a fractal on price before trading back toward the direction of the trend.

Regardless of your method for entering the trade, finding the strongest currency and buying it against the weakest currency will do a lot of the work for you. Regardless of the mismatch and the entry, we recommend you set your trade size appropriate to your account size and risk goals.

Happy Trading!

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–Written by Tyler Yell, Trading Instructor

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