Best relative strength opportunities for USD strength
Relative strength is an extremely important—and overlooked—aspect of forex trading.
In short, relative strength involves analysing each side of a currency pair to see where the best opportunities exist. If USD is strong, we want to look for the WEAKEST other currency. The opposite is true if USD is weak, we want to look for the STRONGEST currency. When you combine a strong and a weak currency you are more likely to see a powerful trend in one direction. You can get trends without this being true, but these trends tend to be weaker and have sharper retracements which results in a poor risk:reward.
A simple way to conceptualise relative strength is to consider how the same concept used in stock markets. Would it be better to buy Apple shares when SPY is heading up or down? You will have a higher chance of winning if SPY is heading up and Apple is heading up faster. This is relative strength. We take that same basic concept and apply it to Forex by looking at each currency on its own merits.
TlDr Relative strength = Stronger trends, better risk:reward, higher winrates.
Since USD is currently strong, we should get a sense for the weakest currencies to find good pairs to trade.
Thankfully, TradingView makes this very easy. To find a currency strength chart, start with the currency code, such as EUR, and then add WCU. EURWCU will give you a currency strength chart for the Euro, CHFWCU will give you a strength chart for the Swiss Franc, and so on.
I look at these WCU's in my scanner and here are my current thoughts.
Long trades:
CHF:
CHF is breaking out lower, meaning any long trade on USDCHF is more likely to break out higher. In fact, CHF is one of the weakest currencies according to my scanner. This is bullish for USDCHF.
JPY:
JPY has been weak most of this year, but it is holding a range right now. A long on USDJPY may have limited upside.
CAD:
CAD is in a downtrend, meaning USDCAD could be a good long trade.
Short trades:
GBP:
GBP has been weak recently but is currently ranging. I have made some fantastic short trades on GBPUSD this week (see my other ideas). But it isn't as weak as EUR, so I might look at a EURUSD short instead.
EUR:
EUR is definitely a lot weaker than GBP. If it continues down I would feel comfortable shorting EURUSD, as long as there is a confluence on that chart too.
Final notes:
This is only valid as long as USD stays strong. If USD becomes weak (such as with unexpected FOMC news today) then the dynamics of the situation would've changed and I would take another look at the overall situation before getting into a trade. This is not trading advice, but rather a tutorial for how to conceptualise relative strength and use it as part of your own analysis.
Give the strength charts a go. At the very least they give you a completely different way to view Forex pairs. Pairs trend best when one currency is strong and another is weak. Don't miss out on this basic tool that can greatly enhance your trading.
Best of luck!
In short, relative strength involves analysing each side of a currency pair to see where the best opportunities exist. If USD is strong, we want to look for the WEAKEST other currency. The opposite is true if USD is weak, we want to look for the STRONGEST currency. When you combine a strong and a weak currency you are more likely to see a powerful trend in one direction. You can get trends without this being true, but these trends tend to be weaker and have sharper retracements which results in a poor risk:reward.
A simple way to conceptualise relative strength is to consider how the same concept used in stock markets. Would it be better to buy Apple shares when SPY is heading up or down? You will have a higher chance of winning if SPY is heading up and Apple is heading up faster. This is relative strength. We take that same basic concept and apply it to Forex by looking at each currency on its own merits.
TlDr Relative strength = Stronger trends, better risk:reward, higher winrates.
Since USD is currently strong, we should get a sense for the weakest currencies to find good pairs to trade.
Thankfully, TradingView makes this very easy. To find a currency strength chart, start with the currency code, such as EUR, and then add WCU. EURWCU will give you a currency strength chart for the Euro, CHFWCU will give you a strength chart for the Swiss Franc, and so on.
I look at these WCU's in my scanner and here are my current thoughts.
Long trades:
CHF:
CHF is breaking out lower, meaning any long trade on USDCHF is more likely to break out higher. In fact, CHF is one of the weakest currencies according to my scanner. This is bullish for USDCHF.
JPY:
JPY has been weak most of this year, but it is holding a range right now. A long on USDJPY may have limited upside.
CAD:
CAD is in a downtrend, meaning USDCAD could be a good long trade.
Short trades:
GBP:
GBP has been weak recently but is currently ranging. I have made some fantastic short trades on GBPUSD this week (see my other ideas). But it isn't as weak as EUR, so I might look at a EURUSD short instead.
EUR:
EUR is definitely a lot weaker than GBP. If it continues down I would feel comfortable shorting EURUSD, as long as there is a confluence on that chart too.
Final notes:
This is only valid as long as USD stays strong. If USD becomes weak (such as with unexpected FOMC news today) then the dynamics of the situation would've changed and I would take another look at the overall situation before getting into a trade. This is not trading advice, but rather a tutorial for how to conceptualise relative strength and use it as part of your own analysis.
Give the strength charts a go. At the very least they give you a completely different way to view Forex pairs. Pairs trend best when one currency is strong and another is weak. Don't miss out on this basic tool that can greatly enhance your trading.
Best of luck!
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.