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The 4X EDGE Currency Barometer is one of the core indicators we use all the time. This unique tool is not only essential for scalping, but also for swing and long term trading.
What’s the idea behind it?
When you open a trade in the Forex market you trade currency “pairs”. Meaning, you trade one currency against another currency. You simultaneously buy one currency and sell another. 4X EDGE tools analyze dozens of currency pairs and provide dedicated data for the 17 most popular currency pairs. Our Currency Barometer pulls data for the 8 “major” currencies.
If you take a look at your ordinary Metatrader terminal with 17 charts opened, once the market starts trending, you will notice simultaneous action of multiple currency pairs. Naturally, pairs that bear the same currency either as base or cross will move in tandem.
For example, when a negative JPY economic news event is published, the negative news event affects the action of multiple currency pairs: USDJPY, EURJPY, GBPJPY, CADJPY, NZDJPY, AUDJPY and all other JPY currency pairs. From your price charts, you can see that the value of JPY is now deteriorating. However, without the proper tools, you cannot "measure" the overall weakening of the JPY as a single currency.
Things get even more complicated when two or more such news events are published for different currencies at the same time. The Forex market can become chaotic in an instant.
We need a better picture of what is happening on the market. We need a tool that would show us a strength of the major currencies at any given time.
What does Currency Barometer measure?
It would be great to know the strength of a single currency every second. However, currencies DO NOT have an absolute value. The strength of a single currency is only determined by comparing it’s value with the value of another currency or value of the goods on the market.
The next best thing is to measure the MOMENTUM of a single currency and that is what Currency Barometer does.
The momentum is not the same as the currency strength, the momentum is a potential that the value of the currency can be changed fast, but other market conditions apply. Only under the right conditions, the momentum and the strength of the currency move simultaneously.
Let’s take the analogy from car driving for example: The RPM meter of the engine would be a momentum of the currency, the speedometer measures a currency strength and the gear indicator is replaced with market volatility meter, the ATR meter. When ATR is low, let’s say under 3 pips, the momentum rises but the currency strength doesn’t rise as high as we expect it to, only when the volatility gets up to 3 or more pips, the strength starts to rise rapidly and simultaneously with the momentum. At some point, both the strength and the momentum starts to fall back, but the momentum may retrace faster than the currency strength.
What generates the momentum?
The momentum is the result of the reaction triggered by a sentiment the traders have towards a single currency.
For example, a positive economic news event for the GBP will increase the sentiment that the GBP is undervalued, which in turn affects all of the GBP currency pairs. The reaction from the Forex market is manifested in the form of frantic buying of the GBP across the market. The result of this reaction is an upward momentum of the GBP, and this is what we can see and "measure" on the Currency Barometer. Without the Currency Barometer we can only see the GBP pairs moving, but we cannot tell how "strong" the GBP is trending.
We use the Barometer to compare momentum of multiple currencies so we can determine the best currency "pair" to trade.
When markets are active, the ability to determine which currencies have greatest momentum is critical.
How do we measure the momentum?
Our servers monitor the correlation between all currency pairs that bear the same currency. Then after some serious number-crunching, the currency barometer indicator displays the trend or momentum value for each currency at any given second. It sounds simple. However, each Currency Barometer requires its own series of servers and data feeds. The end result is a very accurate "reading" for each currency.
This is a table with the resulting Currency Barometer values in numerical form. We call this tool the Numerical Currency Barometer Dashboard. But, we can present the same data in other forms as well. There are several different Currency Barometers including: 2 dashboards, scalper, short term, medium term, long term and even dedicated currency pair data for more advanced analysis. The next few videos in this series will explain more.