Trading the STRONG against the weak! (currency strength calc)
*Please hit the zoom-out button once*
(or more if you're feeling wild)
This may look like a mess, but the last few "bars" on the chart are holding some useful information!
I'm sure I'm not the first one on here to think of this. My apologies for the messy work though, because the chart gets scrambled when you move it, the text moves all over the place and the calculations are probably completely wrong, but I'm sure you get what I'm trying to do here.
Trading currencies that are gaining strength against currencies that are losing strength is obviously a good way to go, so this is an attempt to illustrate the increase/decrease in strength of a currency compared to 7 others, to help filter out those bad trades and get us into good ones for many pips of profit.
Now check out the chart. How often a year does a currency significantly change direction? Who out there was/is still shoring the USD, AUD and CAD and buying the EUR, JPY and CHF on the hourly, 4-hourly and daily TF's right now?
I know I haven't. I have been and will be only buying CAD, AUD, USD and now also GBP and NZD and I will be only selling EUR, JPY and CHF until the direction significantly changes. Which could of course happen at any time for all I know and when it does we look to trade that currency only the other way and count the money we made on the long run we just had!
The strengthening and weakening of a currency as you can see can last for months. Realising this changed my trading forever.
My interpretation of the chart: Currencies that are significantly sloping away from eachother are candidates for trend trading. Currencies that run paralel to eachother are ranging and can be traded from the top of a band or channel to the bottom with confidence.
I hope this makes sense.
CHF = Aqua Blue (light)
EUR = Turqoise (darker)
GBP = Blue (dark)
AUD = Orange
NZD = Gray
CAD = Maroon Red
USD = Red
JPY = Yellow
USD Sum = 1/(EURUSD+GBPUSD+AUDUSD+NZDUSD+1/USDCAD+1/USDJPY)
Following that, then the EUR Sum
EUR Sum = 1/(1/EURUSD+1/EURCAD+1/EURGBP+1/EURAUD+1/EURNZD+1/EURJPY)
and so on... I took this approach when I noticed the shapes of the USD sum and the USD index were in big disagreement. My first thought was that the fractions aren't added right.
This makes sense to me... just take an example with any numbers and look at the sums, you would add them as I have above, rather than adding with common numerators, and differing denominators. It seems as though this is more along the lines how the US Dollar Index is calculated, judging by the agreement in curve shape. I have a nice illustration, just no way to put the picture up...
Perhaps you could cut and past the different symbols into tradingview:
You will see way better agreement between the inverse of the proper sum and the US Dollar Index, than with the sum with USD in the numerator (remember a fraction is a numerator over a denominator and you want to add fractions with a common denominator).
Either way gives you a great idea which currencies are broadly weak, strong, or stable. I have had great results since I started using this as a stepping stone to decide on pair and direction, then finding setups from there.
So the currency strength plot will be more straight forward to enter.