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In our live Trading Webinars we often refer to finding out which currencies are the strongest and which are the weakest. By making that determination we can pair the currencies so that we have a strong versus a weak or a weak versus a strong.
By matching up a strong with a weak, however, we can have a bit more confidence in knowing the direction of the likely move. Then, if we match the direction of that potential move with the direction of the trend on the Daily chart, we have a clear trading edge.
For example, currently the USDCHF pair is in a downtrend on the Daily chart.
So selling that pair in the direction of the Daily trend is a higher probability trade. I use a 4 hour chart with a SMA on it. On a sheet of paper, a legal pad or an Excel spreadsheet, I list the currencies not the pairs but the currencies themselves in a vertical column.
For example, EUR, USD, CHF, etc.
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If it is trading above the SMA that means that the EUR is stronger than the USD at that point in time. I make a note of that next to the EUR and the USD in the vertical column…EUR gets an up arrow and the USD gets a down arrow.
Then I go to the next currency and go through the same process. All in all I bring up about 25 pairs on the charts each day before the open of the New York session and it takes less than 15 minutes.
For example, if the EUR has 5 up arrows and 2 down arrows and the JPY has 3 up arrows and 4 down arrows, that means that the EUR, overall, is stronger than the JPY. Next, I match the strongest with the weakest and go to the charts and look for a technical reason, such as a break of support or resistance, to enter the trade in the direction of the trend.
A pair that has a strong currency paired against a weak currency would be a candidate for a buy in a Daily uptrend. On the other hand, a weak paired against a strong would be a candidate for a sell in a Daily downtrend. As far as the pairs that I personally look at, I run this analysis on all combinations of the following currencies: USD, EUR, GBP, JPY, AUD, NZD, CHF and CAD. The process is very basic, straightforward and quite boring …b ut it works.
As a side benefit, while I am going through the process of checking the 4 hour chart on each pair, I really get a sense for what is going on in the market at the time.
And that information serves me well as the trading day progresses. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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