Forex Relative Strength Matrix

2 Kas

Traders often feel uncertain about which Forex pair to open a position with. This indicator is designed to help in that regard.

This indicator was created as described in the book Swing Trading with Heiken Ashi and Stochastics. In the original, the author suggests using it for swing trading. The author recommends applying it to a monthly chart with an 8-period moving average to analyze the context.

The logic of the indicator is to measure the relative strength of each currency by checking if the price of each Forex pair is above or below a chosen moving average. If the price is above the moving average, the base currency is awarded 1 point, indicating strength. If below, it scores 0, indicating weakness. By accumulating points across multiple pairs, the indicator ranks currencies from strongest to weakest, helping traders identify potential pairs for trading.

Trend Identification:

After identifying relative strength, the trader should observe the general trend using a 100-period SMA on 4-hour charts. If the price is above the SMA, the trend is bullish; if below, it is bearish.

Buy Logic:
A buy is triggered when the base currency is strong (price is above the moving average) and the quote currency is weak (price is below the moving average). After identifying the trend direction, the entry is confirmed by a color change in Heiken Ashi candles (from red to green in an uptrend) and a stochastic crossover in the trend’s direction.

Sell Logic:
A sell is triggered when the base currency is weak (price is below the moving average) and the quote currency is strong (price is above the moving average). The sell entry is confirmed by a color change in Heiken Ashi candles (from green to red in a downtrend) and a stochastic crossover aligned with the trend.

Entry Chart:

The entry chart used is the 4-hour chart. The trader should look for entry signals following a pullback in the trend direction, using Heiken Ashi candles. Entry is made when the Heiken Ashi candles change color (from red to green in an uptrend) and there is a smooth crossover of the stochastic indicator in the trend’s direction.

It would also be possible to adapt the indicator for day trading strategies with targets of 1 to 2 days. Here is a recommended setup:

Relative Strength Identification (1-Hour Chart):
Instead of monthly charts, use a 1-hour chart to identify currency strength with a 20-period moving average.
The 20-period moving average on the 1-hour chart captures a balanced view of short- to medium-term direction, covering nearly a day’s worth of trading but with enough sensitivity for day trading.

General Trend (5-Minute Chart with 100 SMA):
On the 5-minute chart, observe the 100-period SMA to identify the general trend direction throughout the day.
Price above the 100 SMA indicates an uptrend, and below indicates a downtrend, confirming the movement in shorter timeframes.

Entry Chart and Signals (5-Minute Chart):
Use the 15-minute chart to look for entry opportunities, focusing on pullbacks in the main trend direction.
Entry Signals: Enter the position when Heiken Ashi candles change color in the trend direction (from red to green in an uptrend) and the stochastic indicator makes a smooth crossover in the trend’s direction.