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Forex
Toolkit
Features
Focus: Technical
Markets: Forex
Time Perspective: Intermediate term
Studies/Files Included:
Indicators
Workspace
Overview
With dozens of forex pairs available to trade and analyze, the performance relationships among all these
pairs give us an opportunity to measure which currencies are performing relatively stronger or weaker
compared to other currencies, and to find the pairings that might best exploit these relative strengths and
weaknesses.
The Forex Pair Performance Strength Score concept is presented here as a set of tools to measure and
monitor these performance relationships and assign a strength score to each individual currency and also to
each currency pair. This is done by examining the performance of each currency across all its pairs and then
combining the scores of the two currencies in each pair.
This paper will focus only on the eight major (most widely traded) currencies: U.S. dollar, Japanese yen,
euro, Swiss franc, British pound, Canadian dollar, Australian dollar and New Zealand dollar. These eight
currencies represent 28 unique tradable currency pairs.
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Notice that we must subtract the scores when the score currency is the quote (second) currency in the
symbol, since a negative performance score for that pair actually means the score was positive for the quote
currency. Lets plug in some sample performance numbers to illustrate the idea.
U.S. Dollar Score = (.5 + .6 + (-.4)) - (.7 + .5 + (-.3) + (-.4)) = +.2 (Raw Total Score)
This raw score for each underlying currency is then normalized to a larger number that can be compared
and sorted more easily in charting or RadarScreen.
Performance
EURAUD
EURCAD
EURCHF
EURGBP
EURJPY
EURNZD
EURUSD
Raw
Score
-0.00160
0.01760
0.00060
-0.01260
0.00640
0.00710
0.00560
0.02310
3.35
FX Strength Score
(Daily Interval)
Aussie
Dollar
British
Pound
Canadian
Dollar
Euro
Japanese
Yen
New
Zealand
Dollar
Swiss
Franc
U.S.
Dollar
4.77
18.19
-16.82
3.46
-4.22
-5.02
2.56
-2.93
The strongest and weakest underlying currencies in table 2 are the British pound and the Canadian dollar
with Strength Scores of +18.19 and -16.82, respectively, yielding a Strength Score of 34.92 for the pair. We
take the Strength Score of the British pound and subtract the Strength Score of the Canadian dollar as
follows:
(+18.19 - (-16.82)) = +35.01
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Calculating this score for all 28 pairs, we can sort and rank the list of forex pairs in RadarScreen in order to
find the strongest and weakest pairs relative to each other.
The weakest pair in figure 2 is CADCHF with a Strength Score of -19.38, the result of the Canadian dollar
score of -16.82 and the Swiss franc score of +2.56 (table 2):
(-16.82 - (+2.56)) = -19.38
Since the Canadian dollar is the weakest underlying currency, it will have a reverse score effect when it is
the quote (second) symbol in the pair, placing those pairs among the strongest/bullish (for example,
GBPCAD or AUDCAD).
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It is important to remember that the score for a single cash forex pair is derived from the total score of the
two underlying currencies that make up the cash forex symbol.
Figure 3: EURUSD with TSL: FX Pairs Strength Score CH
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It is not enough to know the momentum of just a single pair; it is equally important to know the trend of the
Strength Score for each of the underlying currencies that make up the pair. For example, if we are going
long EURUSD, it would be nice to know if the euro score is trending up and the U.S. dollar score is trending
down in order to confirm the trading signal. The TSL: FX Currency Strength Score CH indicator plots the
Strength Score for each of the underlying currencies of a forex pair. You can see that when the two
underlying currency scores cross, the TSL: FX Pairs Strength Score CH indicator for the forex pair crosses
above or below zero on the same bar.
Note: If the symbol in the chart is not a currency pair, the indicator will plot values for all eight underlying
currencies.
One possible application of this information is to confirm a trading signal by waiting for one underlying
currency to be above zero and trending higher and the other currency to be below zero and trending lower.
To help visualize this concept, the TSL: FX Pair Strength Score CH plots a tick mark whenever one
underlying currency score is above zero and the other is below zero, in the direction of the pair score.
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Traders might use this data to explore taking a long position in one of the stronger pairs and a short position
in one of the weaker, using the background color to confirm that the Strength Score of the long currency of
each trade is trending up and the Strength Score of the short currency in each trade is trending down.
You may also want to make sure the two pairs are not overly correlated. In this case, you would probably not
want to trade both GBPCAD (long/strongest) and CADCHF (short/weakest), as both symbols contain CAD.
It might be better to find a non-CAD pair for this. In this sample RadarScreen, the weakest non-CAD (and
non-GBP) pair is the NZDCHF, which might be a good alternative short candidate.
Note: For a discussion of forex correlation and tools for monitoring it, see the Analysis Concepts paper titled
Understanding and Using Correlation Analysis.
Indicators
There are three indicators provided with this Analysis Concepts paper.
1.
2.
3.
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Calculation procedure note: In order to process the intensive calculations and data requirements of these
indicators more efficiently, the indicator values and plots update every 10 seconds and not every tick.
Description
Score
Input
Default
Description
MoLength
13
BarsToLoad
126
The number of bars of historical data to load; this value should be at least double
the MoLength Input plus 100 bars to match the data loaded into each row.
Note: The indicator also loads an additional 150 bars of historical data automatically to stabilize the
calculations when needed. Always double check that the RadarScreen values match the values in charting.
If they do not, you may need to add additional bars of historical data.
Description
Score
Input
Default
Description
MoLength
13
BarsToLoad
500
The number of bars of historical data to load; this value should be the same as the
number of bars loaded into the chart.
Description
Plots the individual Strength Scores of the two currencies in a pair.
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Input
Default
Description
MoLength
13
BarsToLoad
500
The number of bars of historical data to load; this value should be the same as
the number of bars loaded into the chart.
Data note: All of the indicators discussed in this document operate on a fixed set of symbols that cannot be
changed. The 28 forex cash pair symbols are:
AUDCAD
AUDCHF
AUDJPY
AUDNZD
AUDUSD
CADCHF
CADJPY
CHFJPY
EURAUD
EURCAD
EURCHF
EURGBP
EURJPY
EURNZD
EURUSD
GBPAUD
GBPCAD
GBPCHF
GBPJPY
GBPNZD
GBPUSD
NZDCAD
NZDCHF
NZDJPY
NZDUSD
USDCAD
USDCHF
USDJPY
Conclusion
The Forex Pair Performance Strength Score presented in this paper uses the most basic principles of
momentum and relative strength to produce a detailed look into the interrelated dynamics of the cash forex
market. It can provide a high-level overview of how each currency is performing relative to the others,
identify which currencies may be in trends that are accelerating or decelerating, and provide a number of
useful data points and visuals to encourage new trading ideas and models to explore. Of course, a technical
tool such as this is only one part of a comprehensive forex trading plan.
The primary application of the Strength Score concept is symbol selection: that is, identifying those symbols
that have the greatest potential based on their relative ranking and performance within the group of 28
symbols. Tracking the trend of the Strength Score can also be useful in developing entry and exit rules.
Longer-term trend traders can utilize this concept on daily or weekly bar intervals and adjust the length input
for the momentum calculation as desired. Remember, however, that longer input values tend to exaggerate
the indicator lag effect.
Intraday traders can use multiple time frames/intervals (intraday, daily, weekly) to gauge and confirm the
mode or direction of a currency and then use that information to develop or augment intraday trading
decisions.
One possibility for further development of the Strength Score is to track over time changes in the relative
ranking of each symbol compared to the others. This ranking could be displayed over a historical period to
monitor the relative movement of each symbol within the list. This would allow the trader to more easily see
which symbols were moving up and down within the list, determine how long a symbol had been at a
specific level, and better identify trend reversals and rotations of strength.
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