This tutorial will cover how to compare currencies (Forex) properly.
Which currency pair offers the highest performance and the safest investment?
The pair composed of the currency GAINING the most value AGAINST the currency LOSING the most value.
Unlike the stock market, on the foreign exchange market (Forex), we are NOT trading the value of one asset, but the value one asset AGAINST another. This is KEY. We are trading the relationship between two currencies. 1 Euro is always worth 1 Euro and 1 US Dollar is always worth 1 US Dollar. However, 1 Euro can be worth more than 1 US Dollar. Ex: If the EUR/USD is at 1.10, it means that 1 Euro is equal to 1.10 US dollar. And when the EUR/USD climbs from 1.10 to 1.20, the USD lost 10% of its value compared to the Euro, so an additional USD 0.10 is required to buy 1 Euro. It is that DIFFERENCE in value that is responsable for our profit or lost (multiplied by the leverage that we choose to use, of course).
• If the EUR increased by 10% and the CHF increased by 5%. The EUR/CHF pair moved up be 5% (10% - 5%).
• If the EUR increased by 10% and the USD decreased by 5%. The EUR/USD pair moved up by 15% (10% + 5%). The in-between distance is greater since they went opposite ways.
So, a much higher performance comes from trading one currency increasing in value against one currency decreasing in value.
This greatly affects our performance, plus this translates into trading a much easier, steadier solid trend.
But how can we know which currencies are gaining value and which ones are losing value?
Because, while looking at the EUR/USD chart, even if the pair is going up, we don't actually know if we are looking at the Euro increasing in value OR at the US Dollar decreasing in value OR if both are going opposite ways. That is UNCLEAR when we look at the PAIR. The EUR can be strongly moving up while the USD is flat. Or the EUR can be flat and it is the USD that is strongly losing value. Identifying which currency is doing what is key. If for example it is the EUR that is strongly gaining value, instead of trading it against the USD that is flat, we could prefer to trade the strong EUR against a currency that is strongly losing value, like the YEN for example. The EUR/JPY pair would then be way more profitable.
Here's another example. The EUR could be moving UP strong while the USD is also moving UP strong too. And as a result, the EUR/USD PAIR would be pretty FLAT. Trading that PAIR would result in no profit because they are not spreading apart from each other.
So, looking at one PAIR doesn't tell us much. In order to know if a currency is gaining or losing value, we need to look at multiple PAIRS to figure it out. If all EUR PAIRS are moving up, then we really know that the EUR is gaining value. If all the USD PAIRS are moving down, then we really know that the USD is losing value.
But as you will see below, normally that process is time-consuming and quite a tedious task. And this is why we created the indicator 'Compare Forex', which we will look in a moment.
But first, let's look at what we used to do to see if a currency is gaining or losing value. (And right after, we'll be looking at the indicator 'Compare Forex'.)
To know if the Euro is increasing or decreasing in value, we have to compare it with SEVERAL other currencies. On chart, this translates into looking at multiple EUR PAIRS: EURUSD + EURJPY + EURGBP + EURAUD + EURNZD + EURCAD + EURCHF.
By displaying multiple Euro pairs on a single page, we obtain a broader picture. And now we have this thought in mind: Are most EUR pairs moving up or down?
Here are the USD pairs. Are most USD pairs moving up or down?
In general, (on this time frame, screenshot taken in may 2021), the US Dollar is losing value (most are red), while we're not so sure about the Euro.
This general overview helps, but it ain't precise enough and it can easily lead to interpretation.
Instead, now that 'Compare Forex' exists, let's add it to your Forex chart.
Each colored line represents the performance of each currency.
-Moving up = Gaining value.
-Moving down = Losing value
-Above zero = Up trend.
-Under zero = Down trend.
Look for intersecting lines and the zero line (white dotted line).
-A currency crossing another one = Pair direction.
-A currency ABOVE zero + currency UNDER zero = Pair trending.
Here, the EUR, GBP, CAD, NZD, AUD and CHF are above zero = Trending up.
The JPY and USD are under zero = Trending down.
So, build pairs like this:
- Up: EUR/JPY (EUR is trending up AGAINST the JPY trending down)
- Up: GBP/JPY (GBP is trending up AGAINST the JPY trending down)
- Up: CAD/JPY (CAD is trending up AGAINST the JPY trending down)
- Up: NZD/JPY (NZD is trending up AGAINST the JPY trending down)
- Up: AUD/JPY (AUD is trending up AGAINST the JPY trending down)
- Up: CHF/JPY (CHF is trending up AGAINST the JPY trending down)
- Up: EUR/USD (EUR is trending up AGAINST the USD trending down)
- Up: GBP/USD (GBP is trending up AGAINST the USD trending down)
- Up: NZD/USD (NZD is trending up AGAINST the USD trending down)
- Up: AUD/USD (AUD is trending up AGAINST the USD trending down)
- Down: USD/CAD (USD is trending down AGAINST the CAD trending up)
- Down: USD/CHF (USD is trending down AGAINST the CHF trending up)
Note: These are the pairs for the currencies above versus under the zero line. You can also build a lot more pairs if you look at the each currency line crossing each other. Currencies gaining value against losing value.)
This shows that the strongest currency is the CAD and the weakest is the JPY, so of all pairs, the highest performance comes from the CAD/JPY strongly trending up.
The USD/CAD also is strongly trending down.
By trading the strongest against the weakest, the strong momentum of BOTH currencies need to turn in order for the trend to completely reverse.
Hint: Add some trend lines on 'Compare Forex' to estimate where the trend will resume.
Lastly, let's look at a few different settings.
If you'd like to see only the strongest and the weakest currencies, select 'Strongest + Weakest'.
Select 'Chart' to focus on the two currencies on the chart. This is a USD/CAD chart, so we see that the downtrend is mostly created by a very strong CAD. (Even though the USD/CAD offers a great downtrend, perhaps trading the CAD against the weakest currency (the JPY) offers an even greater performance. This is fine tuning at its highest level.)
Select 'Chart + Intensity' to display the 2 currencies of the chart + a background that paints the direction and the intensity.
More options are available from the 'Compare' dropdown:
• We can select 'Up/Down Summary' to display a list of all the pairs going up and down.
• We can select 'Strong/Weak Summary' to display a list of all the pairs built from the strongest currencies against the weakest currencies.
• We can select 'Pairs' to compare 8 pairs and see which pair(s) offer(s) the highest performance.
And Alerts can be set.
'Alert Summary' informs us of all the Up/Down and Strong/Weak pairs.
'Alert Crossing' informs us when each currency crosses above(strong currency) or below(weak currency) the zero line.
(Dec 2022 update)
These are all H6 charts. At the top left, 'Compare Crypto' indicates the best pairs. As a result, in the next 7 boxes, we ride solid TRENDS consistently.
The indicators in the 7 boxes are 'Angle' and 'Template' (with 'Steepness Background' + 'Intensity Background' + 'Phase' bar paint).