Relative currency strength

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The Relative currency strength (RCS) is a technical indicator used in the technical analysis of forex market. It is intended to chart the current and historical strength or weakness of a currency based on the closing prices of a recent trading period.It's based on Relative Strength Index and mathematical decorrelation of 28 cross currency pairs.It shows relative strength momentum of selected major currency. (EUR, GBP, AUD, NZD, USD, CAD, CHF, JPY)
The RCS is typically used on a 14*period timeframe, measured on a scale from 0 to 100 like RSI, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum of currency.
Combination of Relative currency strength and Absolute currency strength indicators gives you entry and exit signals for currency trading.
Contents [hide]
1 Basic idea
2 Signals
3 Indicator
4 Advantageous for trading strategies
5 See also
6 References
7 External links
[edit]Basic idea

Indicator basic idea is "buy strong currency and sell weak currency".
If X/Y currency pair is in an uptrend, it shows you if it's due to X strength or Y weakness.
On these signals you can choose the most worth pair to trade.
[edit]Signals

You can use Relative currency strength for pattern trading as well, among basic patterns which can be used are: cross, trend break, trend follow,divergencies divergencies.

Cross



Trend-break



Divergence

[edit]Indicator


Combination of Relative currency strength and Absolute currency strength



Absolute currency strength

Advantageous for trading strategies

Most commonly used as combination with Absolute currency strength
information indicator to realize which currencies are being demanded, this is ideal indicator for trend follow traders
help for scalpers looking for strength trend (trader can see both absolute and relative strength)
instrument for correlation/spread traders to see reactions of each currencies on moves in correlated instruments (for example CAD/OIL or AUD/GOLD)

Using Equities to Trade FX

Did you know that equity markets can also be used to help gauge currency movement? In a way, you can use the equity indices as some kind of a forex crystal ball.

Based on what you see on the television, what you hear on the radio, and what you read in the newspaper, it seems that the stock (equity) market is the most closely covered financial market. It's definitely exciting to trade since you can buy the companies that make the products you can't live without.



One thing to remember is that in order to purchase stocks from a particular country, you must first have the local currency.

To invest in stocks in the Japan, a European investor must first exchange his euros (EUR) into Japanese yen (JPY). This increased demand for JPY causes the value of the JPY to appreciate. On the other hand, selling euros increases its supply, which drives the euro's value lower.

When the outlook for a certain stock market is looking good, international money flows in. On the other hand, when the stock market is struggling, international investors take their money out and look for a better place to park their funds.

Even though you may not trade stocks, as a forex trader, you should still pay attention to the stock markets in major countries.

If the stock market in one country starts performing better than the stock market in another country, you should be aware that money will probably be moving from the country with the weaker stock market to the country with the stronger stock market.

This could lead to a rise in value of the currency for the country with the stronger stock market, while the value of the currency could depreciate for the country with the weaker stock market. The general idea is: strong stock market, strong currency; weak stock market, weak currency.

If you bought the currency from the country with the stronger stock market and sold the currency from the country with the weaker stock market, you can potentially make some nice dough.

Intermarket Correlations

Before we detail the relationship between the com-dolls and gold, let's first note that the U.S. dollar and gold don't quite mesh very well.

Usually, when the dollar moves up, the gold falls and vice-versa.

The traditional logic here is that during times of economic unrest, investors tend to dump the greenback in favor of gold.

Unlike other assets, gold maintains its intrinsic value or rather, it's natural shine!

Nowadays, the inverse relationship between the Greenback and gold still remains although the dynamics behind it have somewhat changed.

Because of the dollar's safe haven appeal, whenever there is economic trouble in the U.S. or across the globe, investors more often than not run back to the Greenback.

The reverse happens when there are signs of growth.

Take a look at this awesome chart:



Currently, Australia is the third biggest gold-digger... we mean, gold producer in the world, sailing out about $5 billion worth of the yellow treasure every year!

Historically, AUD/USD has had a whopping 80% correlation to the price of gold!




Not convinced? Here's another one:



Across the seven seas, Switzerland's currency, the Swiss franc, also has a strong link with gold. Using the dollar as base currency, the USD/CHF usually climbs when the price of gold slides.

Conversely, the pair dips when the price of gold goes up. Unlike the Australian dollar, the reason why the Swiss franc moves along with gold is because more than 25% of Switzerland's money is backed by gold reserves.

Isn't that awesome?

The relationship between gold and major currencies is just O

Carry Trade

Did you know there is a trading system that can make money if price stayed exactly the same for long periods of time?

Well there is and it's one the most popular ways of making money by many of the biggest and baddest money manager mamajamas in the financial universe!

It's called the "Carry Trade".



A carry trade involves borrowing or selling a financial instrument with a low interest rate, then using it to purchase a financial instrument with a higher interest rate.

While you are paying the low interest rate on the financial instrument you borrowed/sold, you are collecting higher interest on the financial instrument you purchased. Thus your profit is the money you collect from the interest rate differential.

For example:

Let's say you go to a bank and borrow $10,000. Their lending fee is 1% of the $10,000 every year.

With that borrowed money, you turn around and purchase a $10,000 bond that pays 5% a year.

What's your profit?

Anyone?

You got it! It's 4% a year! The difference between interest rates!





By now you're probably thinking, "That doesn't sound as exciting or profitable as catching swings in the market."

However, when you apply it to the spot forex market, with its higher leverage and daily interest payments, sitting back and watching your account grow daily can get pretty sexy.

To give you an idea, a 3% interest rate differential becomes 60% annual interest a year on an account that is 20 times leveraged!

In this section, we will discuss how carry trades work, when they will work, and when they will NOT work.

We will also tackle risk aversion (WTH is that?!? Don't worry, like we said, we'll be talking more about it later).

German ZEW Economic Sentiment

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Sun
Sep 18 6:00pm NZD
Westpac Consumer Sentiment

112.0
112.0

7:01pm GBP
Rightmove HPI m/m

0.7%
-2.1%

7:01pm GBP
BOE Quarterly Bulletin

All Day JPY
Bank Holiday

Mon
Sep 19 10:00am USD
NAHB Housing Market Index

14
15
15

10:30am USD
President Obama Speaks

2:00pm CAD
Gov Council Member Lane Speaks

9:30pm AUD
Monetary Policy Meeting Minutes

Tue
Sep 20 1:45am CHF
SECO Economic Forecasts

2:00am CHF
Trade Balance

0.81B
1.97B
2.81B

2:00am EUR
German PPI m/m

-0.3%
0.1%
0.7%

5:00am EUR
German ZEW Economic Sentiment

-43.3
-44.3
-37.6

5:00am EUR
ZEW Economic Sentiment

-44.6
-42.3
-40.0

8:30am CAD
Leading Index m/m

0.0%
0.2%
0.1%

8:30am CAD
Wholesale Sales m/m

0.8%
0.7%
0.0%

8:30am USD
Building Permits

0.62M
0.60M
0.60M

8:30am USD
Housing Starts

0.57M
0.59M
0.60M

11:45am CAD
BOC Gov Carney Speaks

6:45pm NZD
Current Account

-0.92B
-0.69B
-0.09B

6:53pm NZD
Visitor Arrivals m/m

8.0%
8.8%

7:01pm GBP
Nationwide Consumer Confidence

48
47
49

7:50pm JPY
Trade Balance

-0.29T
-0.01T
-0.16T

8:30pm AUD
MI Leading Index m/m

0.5%
0.1%

10:00pm CNY
CB Leading Index m/m

0.6%
0.9%

11:00pm NZD
Credit Card Spending y/y

4.7%
7.2%

Wed
Sep 21 12:30am JPY
All Industries Activity m/m

0.4%
0.9%
2.2%

4:30am GBP
MPC Meeting Minutes

0-0-9
0-0-9
0-0-9
4:30am GBP
Public Sector Net Borrowing

13.2B
11.3B
-5.2B

7:00am CAD
Core CPI m/m

0.4%
0.1%
0.2%

7:00am CAD
CPI m/m

0.3%
0.1%
0.2%

7:35am GBP
MPC Member Dale Speaks

9:20am AUD
RBA Deputy Gov Battellino Speaks

10:00am USD
Existing Home Sales

5.03M
4.76M
4.67M

10:30am USD
Crude Oil Inventories

-7.3M
-1.6M
-6.7M

2:23pm USD
FOMC Statement

2:23pm USD
Federal Funds Rate

<0.25%
<0.25%
<0.25%

6:30pm AUD
RBA Assist Gov Lowe Speaks

6:45pm NZD
GDP q/q

0.1%
0.5%
0.9%

10:30pm CNY
HSBC Flash Manufacturing PMI

49.4
49.9

Thu
Sep 22 1:30am AUD
RBA Annual Report

3:00am EUR
French Flash Manufacturing PMI

47.3
48.6
49.1

3:00am EUR
French Flash Services PMI

52.5
54.4
56.8

3:30am EUR
German Flash Manufacturing PMI

50.0
50.2
50.9

3:30am EUR
German Flash Services PMI

50.3
50.6
51.1

4:00am EUR
Flash Manufacturing PMI

48.4
48.6
49.0

4:00am EUR
Flash Services PMI

49.1
51.1
51.5

5:00am CHF
ZEW Economic Expectations

-75.7
-71.4

5:00am EUR
Industrial New Orders m/m

-2.1%
-1.1%
-1.2%

6:00am GBP
CBI Industrial Order Expectations

-9
-5
1

8:30am CAD
Core Retail Sales m/m

0.0%
0.2%
0.0%

8:30am CAD
Retail Sales m/m

-0.6%
-0.2%
0.8%

8:30am USD
Unemployment Claims

423K
419K
432K

10:00am EUR
Consumer Confidence

-19
-18
-17

10:00am USD
CB Leading Index m/m

0.3%
0.2%
0.6%

10:00am USD
OFHEO HPI m/m

0.8%
0.0%
0.7%

Day 1 ALL
G20 Meetings

10:30am USD
Natural Gas Storage

89B
91B
87B

8:00pm AUD
CB Leading Index m/m

-0.1%
-0.8%

All Day JPY
Bank Holiday

9:30pm AUD
RBA Financial Stability Review

Fri
Sep 23 3:30am CHF
SNB Quarterly Bulletin

4:00am EUR
Italian Retail Sales m/m

-0.1%
0.3%
-0.3%

4:30am GBP
BBA Mortgage Approvals

35.2K
33.2K
33.7K

9:00am EUR
Belgium NBB Business Climate

-9.4
-8.9
-7.8

Day 2 ALL
G20 Meetings

All Day ALL
IMF Meetings

1:30pm USD
FOMC Member Dudley Speaks

4:30pm EUR
ECB President Trichet Speaks

Sat
Sep 24  10:00am NZD
Daylight Saving Time Shift

7:00pm EUR
ECB President Trichet Speaks

Currency Crosses

A "currency cross pair", also known as "cross-currency pair" or simply as a "cross", is a pair of currencies that doesn't involve the U.S. dollar.

Back in the ancient days, if someone wanted to change currencies, they would first have to convert their currencies into U.S. dollars, and only then could they convert their dollars into the currency they desired.



For example, if a person wanted to change their U.K. sterling into Japanese yen, they would first have to convert their sterling into U.S. dollars, and then convert these dollars into yen.

With the invention of currency crosses, individuals can now bypass the process of converting their currencies into US dollars and simply convert it directly into their desired currency. Some examples of crosses include: GBP/JPY, EUR/JPY, EUR/CHF, and EUR/GBP.

Calculating Cross Rates



Warning: This part is a little boring...unless you like numbers. It's not difficult but it can be kind of dry. The good news is that this section really isn't necessary anymore since most broker platforms already calculate cross rates for you.

However, if you are the type that likes to know how everything works, then this section is for you! And besides, it's always good to know how things work right? In this section, we will show you how to calculate the bid (buying price) and ask (selling price) of a currency cross.

Let's say we want to find the bid/ask price for GBP/JPY. The first thing we would do is look at the bid/ask price for both GBP/USD and USD/JPY.

Why these 2 pairs?

Because both of them have the U.S. dollar as their common denominator.

These 2 pairs are called the "legs" of GBP/JPY because they are the U.S. dollar pairs associated with it.

Now let's say we find the following bid/ask prices:

GBP/USD: 1.5630 (bid) / 1.5635 (ask)

USD/JPY: 89.38 (bid) / 89.43 (ask)

What is Traded?

The simple answer is MONEY.

Because you're not buying anything physical, this kind of trading can be confusing.

Think of buying a currency as buying a share in a particular country, kinda like buying stocks of a company. The price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.

When you buy, say, the Japanese yen, you are basically buying a "share" in the Japanese economy. You are betting that the Japanese economy is doing well, and will even get better as time goes. Once you sell those "shares" back to the market, hopefully, you will end up with a profit.

In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to other countries' economies.

By the time you graduate from this School of Pipsology, you'll be eager to start working with currencies.




Major Currencies

Symbol Country Currency Nickname
USD United States Dollar Buck
EUR Euro zone members Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi
Currency symbols always have three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country's currency.

Take NZD for instance. NZ stands for New Zealand, while D stands for dollar. Easy enough, right?

The currencies included in the chart above are called the "majors" because they are the most widely traded ones.

We'd also like to let you know that "buck" isn't the only nickname for USD.

There's also: greenbacks, bones, benjis, benjamins, cheddar, paper, loot, scrilla, cheese, bread, moolah, dead presidents, and cash money.

So, if you wanted to say, "I have to go to work now."

Instead, you could say, "Yo, I gotta bounce! Gotta make them benjis son!"

Or if you wanted to say, "I have lots of money. Let's go to the shopping mall in the evening."

Instead, why not say, ""Yo, I gots mad scrilla! Let's go rock that mall later."

Did you also know that in Peru, a nickname for the U.S. dollar is Coco, which is a pet name for Jorge (George in Spanish), a reference to the portrait of George Washington on the $1 note?