![]() ![]() ![]() Also, good monetary policies can strengthen a currency, thereby increasing its relevance and demand. When the growth of an economy is high and stable, there will be an increased demand for such currency, and a downward slide in economic growth will reduce the demand for such currency and determine how a forex trader trades such currencies. ![]() Economic Policies/ GrowthĪnother major determinant of the strength of a currency is the economic policies made and the growth of such an economy. While a small rise in inflation may be good for a currency, too much inflation affects the economy, and a government may try to stabilise the rising prices by increasing interest rates which in turn would strengthen a currency in the forex market. Buying higher interest rates increases the rate of return when the currency pairs are exchanged. The higher the interest rates of a particular currency, the higher the demand for the currency, and currencies with lower interest rates experience lower demand. In forex, understanding interest rates in relation to currency strength is advantageous as a trader can make a profit from the difference between the interest rate of two currencies. Interest rates are the amount needed to borrow money and high-interest rates mean it would cost more to borrow a particular currency while lesser interest rates would encourage borrowing and can stimulate an economy. This is one of the first factors considered when evaluating the strength of a currency. Here are some factors that affect the strength of a currency: Interest Rates This can affect the ability of a trader to trade such currency as it determines whether the currency should be bought or should reduce losses and increase the potential for profits. ![]() Factors That Can Affect The Relative Strength Of A Currencyįorex trading can be complicated due to the different variables affecting the strength of such currency. For instance, if you do not find opposing markets in a currency pair, then you know that you are trading the wrong pair and where there is sufficient distance in a currency pair with one moving higher than the other, then that is the best time to sell the weaker currency and buy the stronger one. To solve this, there needs to be a way formulated to measure which market is strongest, the currency you need to buy or sell, and to avoid trading the wrong markets.Ĭurrency strength helps you to understand the value of one currency as it relates to another and what trend you should look out for when making a trade. If they cannot determine which currency is stronger, it affects their ability to buy, sell and make a profit from the currency pairs. When a trader is looking at a chart, they cannot determine which of the currencies is stronger or weaker based on the upward or downward movement of the chart. The forex market is unique because it involves trading two markets together which is not done in the stock market or any other financial environment. However, with so many currencies available for traders, it can be difficult to choose which is most beneficial to trade and that is where relative strength comes into play. These pairs are chosen because they are economically stable and demand insufficient qualities. There are about 27 currency pairs traded in the forex market, with 7 of them being the major currency pairs. It is also a technical indicator used in technical analysis by forex traders to chart the historical and current strength or weakness of currency pairs based on the recent trading periods. Relative currency strength is the purchasing power of a currency when traded against other foreign currencies or used to trade products. Since the currency strength of a pair can increase or decrease depending on the factors affecting such currencies, traders need to have good knowledge of what relative currency strength is and how to calculate it. In forex trading, currency strength is one of the main determinants of the value of currency pairs and can be used by short-term traders to develop news trading strategies. Understanding the relative strength of currencies is a way to understand which pairs are bullish or bearish, confirm the pairs you want to trade, and the best time to trade a pair. ![]()
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