Analyzing the performance of a currency or trying to identify which currencies are the strongest can be a little challenging.
Its different than analyzing other assets like stocks and bonds where you look at a single price.
And in this lesson, we will show you how to compare a foreign currency – as this will provide you with the means to properly analyze a currency pair, and measure the strength of a trend before you decide to invest or trade a currency pair.
But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.
Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.
Comparing Currency Performance
When it comes to analyzing currencies, one currency is always valued by comparing it to another.
But there’s a way to simplify your analysis and quickly help identify which currencies are strong or weak over any period of time.
It starts by looking at all the pairs that involve the Japanese yen.
You might notice the majority of the time, the yen is on the right side of a currency pair.
In a currency pair, the price on the left is known as the base currency. And the price on the right is the quote currency.
So to put it another way, the yen is usually the quote currency. This is because it’s one of the weakest currencies.
It takes a lot of yen to equal one dollar, one euro, one pound, and so on.
Because the yen is the quote in most currency pairs, it provides a useful frame of reference when comparing currencies.
By comparing how each currency performed relative to the yen, we can pinpoint strength and weakness in individual currencies for any time period.
This information is useful when trying to figure out which pairs are trending up or down.
Let’s start with a hypothetical example.
The analysis starts with the US dollar and Japanese yen pair using a one-day chart.
Now we’ll add more yen quoted pairs to create a comparison chart. We’ll add the euro-yen and the pound-yen.
Now that there are three yen-quoted pairs on the chart, lets compare the performance of each for the past day.
This comparison can tell us which among the dollar, euro, or pound is the strongest or weakest for the day.
As the analysis shows, the dollar is the strongest, and the euro is the weakest against the yen.
So how can this information impact your trading?
Well, by knowing which currencies are the strongest and weakest, you can find a currency pair to trade.
By pairing the strongest and weakest among these currencies, you may find a steadily trending pair.
Let’s look at the Euro- US dollar pair.
Sure enough, it is showing a steady downward trend, which signifies weakness in the euro and strength in the dollar.
In this example, we are looking at one day’s relative performance – but the analysis can take place over any time period.
Let’s compare the performance of these three currency pairs over a longer time period, say, three months.
As you can see in the example, the performance over three months differs from the one-day chart. Here the dollar is the strongest, and the pound is the weakest.
So lets combine these two currencies and check out the British pound – US dollar pair on the three-month chart.
As you might expect, the weakness in the pound and strength in the dollar makes for an overall downward trend in the pair.
Now that you understand how to identify strong and weak currencies, you can better identify upward and downward trending currency pairs.
In this lesson, you’ve seen examples of the dollar, euro, and pound paired against the yen.
But remember that you can include many more yen-quoted pairs in your analysis.
Including more pairs could help you find a greater range of strong and weak currencies, which might lead to identifying a new currency pair with an even stronger trend.
Compare Foreign Currencies
- When it comes to analyzing currencies, one currency is always valued by comparing it to another
In order to conduct further analysis into the performance of a currency….
- Start by comparing major base currencies with the Japanese yen
- You can then use this for any time frame that you wish to use – and as this was not mentioned before in the article above, you can use technical indicators as a way to enhance your technical analysis
- From there you can easily figure out which is the strongest currency – and which is the weakest – all when paired against each other
- Take the strongest and the weakest to form the major “currency pair” – and pull up a chart to confirm your suspicions
- This analysis can be used to help determine the strength of a trend for the currency pair that you wish to invest or trade
And this is a valuable method that can be used to help conduct your technical analysis of forex currency pairs.
In the method above, you would take all the currency that you want to potentially trade, and see how they pair up against the Japanese yen.
The more yen currency units it takes to make up a single euro, dollar, pound, ect – the stronger the base currency is – and vice versa (the fewer the yen, the weaker the base currency).
You can then use this to identify the strongest and the weakest base currency that are matched up against the yen to create a currency pair (i.e. USD/JPY + EUR/JPY = EUR/USD, USD/JPY + GBP/USD = GBP/USD, ect.)
Typically, if you have identified the strongest and the weakest base currencies, and they are matched up against each other, you can easily identify that there may be a downward trend that may or may not gain strength – the markets are crazy like that. You can even take this one step further and implement technical indicators (popular technical indicators include: moving averages (simple or exponential), MACD, CCI, RSI – just to name a few) as this should only solidify your hypothesis as to how the currency pair is trending.
You can see this “divergence” in the strength in currency pairs due to the changing of interest rates (i.e. if the EUR/USD is downtrending, perhaps the European central bank is lowering their interest rates, while the US Federal Reserve is rising interest rates) – among other foreign economic policies that play a factor into the ever-changing exchange rate of a currency pair.
It should be noted that results may vary, as there are other factors that you need to consider in order for this to work – as this is best used if you also utilize both fundamental and technical analysis.
I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.