May the Strength be with You 8

Ciao a tutti,
this is not the review of a Star Wars’ episode but my first post belonging to the “Ideas For Winning Strategies” series 😀


One idea that is often worth taking into consideration in our strategies is the concept of strength analysis among currencies. Let’s assume we want to work with four currencies (namely EUR, GBP, JPY, USD) and consequently with 6 currency pairs (EURUSD, EURGBP, EURJPY, GBPJPY, GBPUSD, USDJPY).

We introduce the concept of “relative strength” of a currency within a specific currency pair. As an example we want to estimate which is the strength of EUR relative to the currency pair EURUSD. Let’s say the strength is a number ranging from 0 to 100. If v1 is the value of strength of EUR within EURUSD, then (100-v1) is the value of strength of USD within EURUSD. In other words the sum of strengths of two currencies relatively to the same pair must be 100.

The following table shows the 6 relative strengths we are going to calculate:

A this point we have the strength of each currency within each pair. As an example the strength of JPY within USDJPY is (100-v6). The “absolute strength” of a currency is the average value of its relative strengths among the pairs it is involved with.
The following table shows how to calculate the absolute strength of each currency:

I haven’t said yet how to calculate v1, v2, …, v6. This can be done in many different ways, but basically we need an indicator that returns a value in a fixed range (an “oscillator”). Then we must decide the period and timeframe of such indicator. Therefore we can have many different “strengths” depending on the indicator, parameters, and timeframe we choose.


How to apply this info to our trading strategy?

I suggest at least two approaches:

1) filtering trades of your current strategy depending on the strength of currencies involved. As an example, if your system gives a buy signal on EURUSD, but we know that EUR has a much lower strength than USD, then this trade should be probably filtered out.

2) building an entire automatic strategy based on the strength concept itself. As an example, a strategy that constantly monitors the 6 pairs EURUSD, EURGBP, EURJPY, GBPJPY, GBPUSD, USDJPY and enters a trade only on 1 pair at a time when a huge spread among strengths is detected (buy EURUSD if EUR is the strongest currency and USD is the weakest one in our analysis).

Andrea is going to publish a series of posts that analyse thoroughly this concept. He is also going to make available indicators for MT4 that are built upon these concepts. So stay tuned 😉

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8 thoughts on “May the Strength be with You

  • Todd

    I think that such an EA that would open up one trade at a time in such a manor would be great if you can get in and out at the right time.
    My thoughts would be multi time frames not only to get in but to get out also.
    Lets say that eur/usd is the strongest on 1hr. time frame for long, then wait till 5min goes short and when it changes back to long and if 1hr still says long it takes a trade. Then exit when 1/2 hour time frame goes neg. and also a sweet indicator that goes along with it so visualy look back in history to adjust your statigy for back test. Also keep out of major news events for whip lash. And why I am making a Christmas list also be able to adjust ones stratigy easy and place multi orders if price action moves strong with a limit of how many orders to place. Like if strong trend and in proffit open a new trade based on 5min. or even 1min. this way you gain more positions if every thing goes in your favor but if wrong you end up with a small loss. And fit in a clever way to manage multipule postions for exit. Milk it yet take proffits also so in case things get ugly you still win. Also(ya I know) Some clever way to read price action like smart enter and exit based on past highs and lows with break out have small position left open just to keep it interesting. Lots of small trades building in the right direction. Sell some and hold some and build more if market keeps going in your favor. Now that would be a spectacular EA.
    Just what I am looking for that I searched and searched for and can’t find. Oh did I also mention stable as a house built in granit.
    Pip On

    • Andrea

      Hi Todd,
      nice ideas there.
      Keep reading as in the very next few days we’ll publish a series of articles going more in depth about the argument and about how I trade it.
      There’s also a set of indicators and an EA developed around it. Still for me and Paolo only but maybe that we’ll decide to make them public soon if there’re enough people interested in them 😀

  • Todd

    I will be here waiting. I can’t wait to see how you all trade with it. I would be very interested in being a beta tester for this.
    Pip On

    • Andrea

      Hi Todd,
      Everything is already developed and under test. Thanks for you offer we’ll take you into account in case we’ll need additional beta testers.

  • FxPulsator

    Hi Andrea,

    Nice concept for trading the strength, challenge is to find the entry & exit trigger for the trade. For that equally important would be strength monitoring algorithm (besides identifying the strength), which senses when the trend is tapering off for the currency pair, and trigger the trade entry & exit.
    This concept can be used for both types of EAs:
    a) The Scalper EA, dealing with micro time frames &
    b) The Swing EA, dealing on macro time frames.

    It would be good idea to work the concept on non-traditional time frames ie. 3M, 7M, 20M etc…. 3M charts are much smoother than 1M and allows better entry/exit than usual 5M.


    • Andrea

      Yes the basic concept can be applied to any timeframe analysis and so to any kind of trading strategy. That kind of analysis can be made to filter entries of an already existing trading system (manual or automatic) as well as a trading system itself.

      In the next posts I’ll detail a couple of strategies I use for trading the currency strength/weakness along with a few additional analysis to improve performances, in particular currencies correlations.