Foreign exchange, or forex, is the most liquid and largest financial market in the world. Traders look to capitalize on fluctuations in currency pairs, but determining which currencies are strong or weak compared to others is key to profitability. Understanding relative currency strength and how to utilize it in your trading strategy can give you an edge in the competitive forex landscape.

Introduction to Relative Currency Strength

Relative currency strength refers to how a currency is performing relative to other major currencies. Rather than looking at a currency pair in isolation, relative strength analysis examines how currencies are faring compared across the board.

For example, if EUR/USD is up but EUR is down against several other major currencies, the euro is actually weak relative to the USD and other foreign currencies. Even though the euro rose against the dollar specifically, its relative strength is poor.

As a forex trader, being aware of which currencies have strong or weak relative strength allows you to focus on buying relatively strong currencies and selling relatively weak ones. This increases the likelihood of picking profitable trades.

There are several key benefits to incorporating relative currency strength into your trading approach:

  • Identify strong and weak currencies – Determine which currencies are outperforming or underperforming the market in real-time.
  • Confirm market direction – If relative strength aligns with the direction of a specific currency pair, it reinforces the trend.
  • Find trading opportunities – Spot discrepancies between currency pairs and relative strength to find lucrative trades.
  • Diversify portfolios – Combine currency pairs with both positive and negative correlations to reduce risk.
  • Improve timing – Pinpoint ideal entry and exit points informed by relative strength metrics.

In this comprehensive guide, we will cover all aspects of relative currency strength analysis for forex trading, including:

Calculating and Charting Relative Strength

The first step is quantifying and visualizing the relative strength of major currencies. Let’s look at some common methods for measuring and charting relative performance:

Percentage Change

A simple approach is to look at the percentage change in closing prices over a defined lookback period. For example, calculate the % change over the past month to gauge monthly relative strength. Positive percentages indicate an uptrend, while negative percentages signal downtrends.

You can then rank the currencies from strongest to weakest based on percentage change. This method provides an easy high-level snapshot of relative strength.

Price Charts

Price charts like daily or weekly candlestick charts can also illustrate relative strength when overlaid to compare two or more currency pairs. If one currency is consistently rising more than another, it has superior relative strength.

Observing chart patterns and trends across currency pairs highlights both similarities and differences in relative strength. Price chart analysis offers a visual tool to spot divergences.

Exchange Rate Heat Maps

Heat maps plot exchange rates between multiple currency pairs on a matrix or grid. The grid boxes are then color coded – typically from green (strong uptrends) to red (strong downtrends). This allows you to scan for currencies with the most extreme relative strength and weakness with ease.

Relative Strength Index (RSI)

The relative strength index (RSI) is an oscillator indicator that generates a value from 0 to 100 based on the magnitude of recent price changes. It specifically measures the speed and rate of price movements.

Currencies with RSI above 70 are overbought with positive relative strength, while those under 30 are oversold and weak. Adding RSI lines to price charts identifies overextended moves to find potential reversals.

Moving Average Crossovers

Crossovers between fast and slow moving averages can uncover subtle shifts in relative strength. When a short-term moving average crosses above a long-term average, improving relative strength is signaled. Moving average crossovers work across any currency pair.

By applying moving averages uniformly across majors, crossovers pinpoint the earliest stages of changing relative strength.

Comparing Currency Performance

Once you have calculated relative strength metrics, the next step is comparing the data to reveal which currencies are truly strong or weak relative to the entire market.

Ranking Currencies

Ranking currencies from strongest to weakest makes it easy to separate top performers from laggards based on your metric of choice. Percentage change tables or RSI levels can be sorted to clearly identify relative strength leaders.

For example, if the USD ranks at #1 while JPY ranks at #10, the data suggests USD has much greater relative strength than JPY. You would thus be biased towards buying USD and selling JPY.

Grouping into Tiers

Rather than narrowly ranking currencies from 1 to 10, you can also group majors into strength tiers. For instance, USD and EUR may be in the “strong” tier this month, while NZD and AUD fall into the “weak” category.

Tiering paints with broad strokes to characterize relative strength and spot significant discrepancies you can exploit.

Isolating Overbought/Oversold Readings

Look for currencies with extreme overbought or oversold conditions based on metrics like RSI. The most overbought currency is likely among the strongest, while the most oversold is probably the weakest.

Focus on outliers with readings above 70 or below 30 as prime trading candidates in the near-term.

Identifying Correlations

Currencies with positive correlation often move in sync, while negative correlations mean pairs move opposite one another. Correlation matrices or heat maps make finding correlations straightforward.

If two currencies are positively correlated, strength in one signals strength in the other as well. Watch for divergence between correlated pairs.

Comparing Alignment Across Metrics

Each relative strength metric has pros and cons. For the most robust analysis, compare multiple metrics side-by-side to ensure signals align. If momentum, price, and RSI all point to the same strength trends, you have confirmation.

If results conflict, dig deeper to determine the source of the discrepancies before placing trades. Consistency across indicators provides greater conviction.

Trading Strategies Using Relative Strength

Once you have conducted relative currency strength analysis, you can actively apply these insights in your trading plan using the following strategies:

Fading Weakness for Counter-Trend Trades

When a currency is underperforming drastically with oversold RSI, consider a contrarian mean reversion trade. Bet on weak currencies to bounce back versus the strong over a shorter timeframe. The extreme weakness signals a potential reversal.

Trading Pullbacks in a Strong Uptrend

If a currency displays powerful relative strength with an RSI above 70, use pullbacks as buying opportunities. With an uptrend confirmed, any retracement lower is likely to be short-lived before bullish momentum resumes.

Identifying Hidden Bullish/Bearish Divergences

Check for divergence between price action on a chart and your relative strength indicator. If price makes a lower low but RSI makes a higher low, that hidden bullish divergence suggests strength. Look to buy on the next higher low.

Execute Breakouts Earlier in Strong Currencies

New uptrends often start with a period of growing relative strength before a breakout thrust higher. Monitor surging relative strength to get into breakouts ahead of time in the strongest currencies.

Avoiding Whipsaws When Strength Shifts

If a buy signal forms on a pair but that currency just flipped to weakness, exercise caution before buying. Shifts in relative strength can lead to whipsaws and false signals. Wait for confirmation the trend aligns with strength.

Hedging Positions by Pairing Weak and Strong

Offset risk by combining long trades in strong currencies with shorts in weak currencies. This approach allows you to profit from relative strength trends in both directions as they unfold.

Setting Wider Stops When Trading With Momentum

Increase stop-loss widths when trading breakouts in a currency displaying powerful relative strength. This protects against volatile swings and avoids premature exit from an extended trend. Manage risk accordingly.

Tuning Strategy Based on Strength Timeframes

Are your trades based on strength metrics across weeks or just hours? Day trade off short-term relative strength, but use long-term strength for directional bias in swing trading. Match strategy holding periods with strength lookback periods.

The beauty of relative strength is flexibility – use these strategies alone or in combination to match varying market conditions and personal trading plans.

Timing Currency Strength Cycles

Like most market phenomena, relative currency strength is cyclical in nature. Strength trends emerge, persist for months, then eventually roll over as another currency assumes the strong relative position.

Well-timed trades require an understanding of how these cycles and rollovers of strength tend to unfold.

Extended multi-month trends of relative strength do develop in forex. JPY strength persisted for years after the Great Recession. When you identify such macro trends, maintain trading bias in that direction until clear signs of exhaustion arise.

Trading Mean Reversion Bounces

After a long stretch of strength, watch for sharp mean reversion moves to signal a cycle rollover. Fade strength after sharp 25%+ counter-trend bounces signal capitulation and reversal.

Monitoring Seasonal Shifts

Calendar patterns influence strength – USD often gains ahead of US tax season then fades in April. EUR and GBP tend to strengthen towards year end. Forecast upcoming rotations based on seasonal history.

Focusing on Monthly Crossovers

Moving average crossovers on monthly or weekly charts is a premier way to spot long-term strength cycle shifts early. Time entries for new macro trends off these momentum cycle change signals.

Noting Extreme Overbought/Oversold Levels

A currency pushing an extreme RSI reading above 80 suggests its long-term strength uptrend is exhausted. Be patient for this warning signal before betting on mean reversion reversing the trend.

Analyzing Rate Differentials

Central bank policy and yield differentials impact longer-term strength trends. If the Fed is far more hawkish than the ECB, that points to upcoming USD strength. Consider macro fundamentals driving capital flows.

Forex strength trends evolve over multi-year macro cycles, so focus on larger timeframes and indicators when seeking to pinpoint cycle turns. Patience and discipline will be rewarded.

Best Practices for Trading Relative Strength

Here are some final best practice tips for effectively integrating relative strength analysis into your forex trading regimen:

  • Use multiple relative strength metrics for corroboration before placing trades. Layer indicators like RSI, price action, moving averages, and more.
  • Note when strength trends agree or diverge from price action in specific currency pairs. Divergence prompts caution, while alignment boosts conviction.
  • Avoid overtrading by patiently waiting for only the best strength differentials and trend signals. Overtrading can destroy results.
  • employ proper risk management techniques like stop losses, position sizing, and diversification to minimize volatility risks that come with trading strength.
  • Set clear trading rules for entering and exiting positions based on relative strength signals. Execute discipline following rules and plans.
  • Adapt strategies to best utilize both short-term and long-term strength trends across multiple timeframes.
  • Regularly update your strength analysis to keep perspective current in the ever-evolving forex markets. Strength trends change fast!

While challenging, actively trading market conditions through the lens of relative currency strength can certainly enhance your forex trading outcomes. Keep these core concepts and strategies in mind as you implement relative strength analysis in your own trading!


Using relative currency strength analysis provides forex traders with a unique perspective into which currencies are outperforming the broader market. Whether using price charts, RSI, moving averages, or other metrics, identifying weak and strong majors relative to their peers offers high-probability trading opportunities.

By buying relatively strong currencies and selling or fading weak ones, traders can boost win rates. Combining relative strength approaches across short and long-term timeframes provides further insight into trend direction and cycle turns. Following disciplined trading strategies aligned to real-time strength rankings will ultimately help improve forex trading performance.

Stay informed on current relative strength trends, utilize the strategies outlined here, and you will be well equipped to profit from the inherent cyclicality of currency strength in the forex arena.