We use the standard formula to calculate the percentage of change for a particular currency pair as follows:
Correlation, in financial terms, is the numerical measure or relationship between two variables. (In this case, these variables are Forex pairs). The range for the correlation coefficient is -1 to +1. A correlation coefficient of +1 signifies that two currency pairs will flow in a similar direction. A correlation of -1 signifies that two currency pairs will move in opposite directions 100% of time. A correlation of -1 indicates that two currencies will move in the opposite direction 100% of the time. Finally, a correlation zero signifies that the relationship is completely random.
Ultimately, it is down to you to decide how to use these tools. Most traders use the strength meter alongside an existing strategy as a way to trade in the same direction as the underlying strength of the markets.
Our currency strength indicator gives you an easy visual guide of which currencies currently have strong currencies and which are weak. The currency strength meter measures each currency's strength across all forex pairs. It then calculates these numbers to determine its overall strength. For further information, please refer to the notes.
We perform this calculation across 28 Forex pairs for each of the 4 time frames and then group the pairs together to work out the underlying strength of a given currency.
If GBPUSD and EURGBP are correlated at -91, they have a negative correlation. This means these pairs will likely move in opposite directions. Therefore, two long or two short trades on these pair would likely cancel one another.
This is important to understand particularly if you are trading the markets on a smaller time frame. A gap-open on a Monday may give you a false impression on the strength or weakness of a particular currency. That’s why it is important to visually confirm what the currency strength meter is telling you about a currencies strength.
Forex strength meters are now currency correlation matrices. These matrices can provide more precise and detailed information. Forex correlation, just like other correlations signals correlation between currency pairs.
* We invert positive or negative values when the USD is the quote of a pair, for base pairs the value remains unchanged.
Currency correlation is the best way of measuring currency strength. If the Forex correlation matrix is coded using the most current technologies, it's unlikely to cause any issues. However, it offers all the same benefits as a currency strengths meter.
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Some products could even produce data which is not consistent with the original concept about currency strength. Some applications use smoothing filters, such moving averages, and some others apply filters (e.g. RSI or MACD. Forex traders could be misled by false signals or lose streaks if they add filters to demonstrate currency strength.
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A currency correlation matrix can be used as a Forex indicator of strength.