How to use the currency strength indicator to identify trading opportunities

How to use the currency strength indicator to identify trading opportunities

In this section from the London forex trading session David explains how to use the currency strength indicator for NinjaTrader to identify which currency pairs to consider and which ones to ignore using multiple timeframes.

00:11

Melbourne lockdown and Spanish flu history

00:11

The speaker acknowledges technical difficulties and appreciates feedback about the coronavirus situation, highlighting local information from Australia. They mention Melbourne entering a six-week lockdown starting tomorrow and the closure of borders between Victoria and New South Wales for the first time since the Spanish flu over a century ago. The conversation also touches on the historical impact of the Spanish flu pandemic, recalling personal anecdotes about its lasting impression on families.

01:30

Introduction to currency strength indicator (CSI)

01:30

The speaker thanks the audience and transitions to discussing the British pound. They then introduce the Currency Strength Indicator (CSI), explaining that it provides valuable information about currency pairs. The CSI helps identify which pairs to consider or avoid by showing the relative strength of currencies.

02:18

Trading trends and reversal strategies

02:18

The speaker discusses trading strategies focused on trends and reversals, emphasizing the need for patience and risk management when trading reversals. They highlight how to identify overbought and oversold conditions using various short time frames, such as 1, 3, 5, and 10 minutes, with examples from currencies like the US dollar and Swiss franc. The speaker notes that rapid reversals require patience and careful stop-loss placement, especially around volatile periods like the London market open, which often features sharp moves and traps.

04:53

Strength and slope of CSI lines explained

04:53

The segment explains how the Currency Strength Indicator (CSI) measures the strength of currency movements by analyzing the steepness of lines representing price action. A steeper line indicates stronger buying or selling pressure. For example, a sharp decline in the pound shows strong selling, while a rising magenta line indicates strong buying in the Japanese yen. The CSI also helps identify which currency pairs are trending strongly, like the pound/yen pair with strong selling in the pound and strong buying in the yen, and which pairs to avoid, such as when the dollar and yen move together, signaling a lack of clear direction.

06:22

Analyzing currency pairs and momentum

06:22

The speaker describes two currencies moving in the same direction with similar strength, comparing it to two parallel trains traveling on the same track with slight speed differences. This analogy explains minor trend developments with equivalent momentum, such as the Aussie following the New Zealand dollar and the Euro following them both. The discussion emphasizes that in such cases, it’s less about isolated pairs and more about monitoring multiple currencies together, especially when using strategies like congestion trading and options.

07:19

The focus shifts to analyzing trends across multiple timeframes using the CSI (Currency Strength Indicator). The one-minute timeframe reflects a microcosm of the ten-minute trend. Taking the example of the pound dollar, there’s slight congestion and pullback after a rally, but the longer-term trend on the ten-minute chart remains sharply downward. Although there is some buying momentum on the five-minute chart, weakness persists, suggesting that a ten-minute trader might be comfortable holding short positions in pound yen or pound dollar pairs.

08:18

The speaker explains another aspect of the CSI involving the position of the cross (intersection) between currencies and how balanced their movement is. A cross occurring near the middle indicates equal potential for the currencies to move in opposite directions, which can create stronger trend opportunities. For example, if the pound yen cross is centered, there is significant potential for the yen to rise and the pound to fall. This balance increases the likelihood of a sustained trend continuation, but there is no guarantee, and traders must monitor currency direction closely.

09:22

Potential and risk in pound-dollar trading

09:22

The speaker analyzes the pound-dollar currency pair, noting that the US dollar is currently at a strong level near the top, with limited potential for further upward movement, while the pound could continue to decline to oversold levels. The discussion emphasizes risk assessment in trading and transitions to reviewing live chart data on various timeframes, focusing on a strong trend observed in the 5-minute cable chart.

10:20

The analysis continues by examining multiple timeframes from 15 seconds up to daily charts, highlighting the development of the trend. The speaker points out key market events including the European open and the London open, explaining the usual increase in trading volume during these times. A recent volume spike and price reversal are discussed as indicators of market dynamics and potential traps, with volume data supporting the interpretation of market strength and volatility.

11:19

Focusing on price action details, the speaker describes candle characteristics such as wicks and volume spikes that suggest weakness in the market. Despite high volume, the price movement does not appear strong, with subsequent candles confirming selling pressure. The analysis underlines how these patterns provide insights into market sentiment and potential direction.

11:44

Volume, support, and resistance levels

11:44

The segment explains the behavior of candles showing volume and buying pressure during the Asian session. Despite strong volume and some buying attempts, the price faces resistance leading to a volatility trigger. This can result in either congestion or reversal, and in this case, a full reversal occurs as the price moves downward through key support levels.

12:36

The discussion continues on price action as a former support level becomes resistance after a failed rally. Another volatility trigger appears, signaling potential congestion or reversal. The indicator used effectively highlights these changes, showing a bearish trend developing with minor buying volume during the European session, which is expected to have higher volume than the Asian session.

13:30

This part introduces the accumulation distribution indicator, which visually represents support and resistance levels by thickening the line at frequently tested price points. The indicator helps identify strong resistance walls created by high volume and price interactions. Some levels are still weak due to limited testing, while others show clear strength, aiding traders in understanding market structure.

14:27

The speaker highlights the importance of multiple timeframes in technical analysis, emphasizing that slower timeframes carry more significance than faster ones. Using the daily chart as an example, a price level tested over several days holds significant weight, influencing intraday price movements. This layered approach helps traders gauge the strength of key levels across timeframes.

15:27

The segment concludes by reinforcing that slower timeframe levels dominate price action weight and that current price trading remains narrow but capped by significant resistance from the daily chart level. This understanding provides insight into the current market’s limited progress and potential intraday trading opportunities.

15:54

Volume point of control and market balance

15:54

The discussion focuses on the volume point of control (VPOC) as a key market level where heavy trading volume occurs, acting as a fulcrum or balance point. If the price breaks through this region, especially around the 1.26 level, volume declines sharply, indicating the price could move through this area more easily. This is important for understanding potential longer-term trends driven by strong buying or selling.

16:26

The volume point of control is compared to a seesaw balanced by equal weights, symbolizing market equilibrium. When this balance shifts due to changes in buying or selling pressure, the price moves away from the VPOC. This analogy helps illustrate why the market tends to congest at the VPOC and how shifts in volume can lead to price movements.

16:55

At the VPOC, heavy volume concentration causes price congestion. Once the price breaks away from this point, traders look for strong volume to confirm the move is solid and supported by market sentiment. This transition marks a shift away from congestion to a trending phase, driven by either buying or selling momentum.

17:24

The analysis shifts to a shorter time frame, the one-minute chart, where quick volume-driven price movements are observed. There is notable selling pressure reflected in a specific candle, indicating a potential rally effort. The trend monitor confirms this short-term trend dynamic, illustrating how volume analysis applies across different time scales.

17:54

Trend monitor and trader psychology

17:54

The speaker explains the challenges of maintaining a bearish trend in trading, highlighting how traders often panic and close positions when profits start to dwindle. They emphasize the usefulness of the trend monitor tool, which offers a more considered view of trends by indicating subtle changes in momentum without prompting premature exits. Using the trend monitor across multiple timeframes enhances its effectiveness despite rapid changes in shorter intervals like 15 seconds.

18:47

The discussion continues on the trend monitor’s indications, confirming the market remains in bearish territory with no significant reversal signs. Strong selling pressure is evidenced by substantial volume and robust candle formations. The speaker notes a brief pause in the trend but no color change on the trend monitor, reinforcing the bearish outlook. They also analyze volume patterns during the European session, noting a two-bar reversal and bearish engulfing pattern capped by resistance. Rising volume during price declines and widening spreads indicate a classic bearish setup, with minor buying attempts failing to reverse the downward momentum.

20:07

Volume analysis across multiple timeframes

20:07

The speaker analyzes price movement through a low volume region, expecting swift changes due to lack of volume-based support. They examine multiple timeframes, noting consistent low volume suggesting rapid price transitions. The volume indicator is temporarily disabled due to live data overload but can be re-enabled to track volume changes per tick, which shows volume building higher. They monitor candle behavior for signs of buying interest if a dip occurs. The trend appears straightforward and strong. The discussion then shifts to currency analysis, focusing on the dollar and pound using heat maps and currency arrays to isolate relevant data.

22:14

Dollar strength and currency array insights

22:14

The speaker analyzes currency trends, focusing on the dollar and pound across various time frames. On the three-minute chart, heavy selling is observed in Euro Pound, New Zealand, and Aussie, while the dollar shows buying strength, particularly in dollar CAD and dollar yen. The dollar Swiss is lagging but expected to rise. An ideal trend stack would have dollar CAD, dollar yen, and dollar Swiss at the top, indicating strong dollar buying, with weaker currencies at the bottom. The Aussie dollar currently shows the strongest downward trend, stronger than cable (GBP/USD). The speaker also notes overlapping trends in cable and euro dollar and examines longer time frames (10 to 15 minutes) to assess the pound’s movement, finding mixed signals with some pound pairs rising while others are not being sold widely.

24:02

Local factors vs universal currency trends

24:02

The discussion focuses on understanding why certain currency movements occur, particularly whether strong movements are driven by one currency’s buying or another’s selling. Using the example of the Australian dollar and the British pound, the speaker emphasizes the importance of determining universal market sentiment when trading currency pairs to identify if moves are driven by broad factors or local influences.

24:56

The speaker highlights how local fundamental data can cause currency pairs like Cable (GBP/USD) to behave differently from broader dollar trends. They advise traders not to analyze pairs in isolation but to use tools like the currency array and currency matrix to get rankings, sentiment insights, and a broader view of multiple currencies simultaneously across different timeframes.

25:27

The currency array provides additional information on potential overbought or oversold conditions for currency pairs, indicated by color changes. The speaker notes the importance of monitoring these signals and mentions transitioning to review the currency matrix and heatmap for further analysis, before briefly addressing a chat question.

By Anna Coulling – creator of volume price analysis