The Forex Strength Meter (FSM) is an algorithm-based technical indicator that helps traders determine the strength of a particular currency. The FSM Indicator on the MT5 Platform can tell you how strong one currency is against another currency in its simplest form. It is one of the most valuable and straightforward indicators you can use. The FSM indicator is usually the first tool traders use when they start their analysis. It is a tool that tries to express the absolute strength of a currency to compare this strength with the power of other currencies.
If you are trading in currencies, you must use a reliable forex trading platform such as MT5 to navigate the market. The forex strength meter MT5 has a significant link with 28 currency pairs, involving major and minor currencies. The major currencies in the forex market are the US dollar, EUR, GBP, JPY, AUD, CHF, NZD, and CAD. You can identify the strength of these currencies by looking at the colors on the side. In addition, the FSM indicator depicts the movements of several currency pairs in different colors.
When the indicator displays a red color, it signals that the currency pair is moving downward. On the other hand, you have to understand that if there is an uptrend, the FSM is green. The advantage of using the FSM is that you constantly know the market trends and adjust your positions accordingly.Also read about liquidity providers ranking here.
How MT5 Works
This technical indicator helps traders make better decisions before placing a trade. It mainly consists of four steps: Determines base currency, pairs said currency with all available currencies, calculates strength relative to each paired currency, and calculates the average score.
You can use FSM at its best if you view it as a ‘filter,’ and the MT5 indicator helps us understand what made a pair move. For example, let’s assume that NZD/USD is changing. The FSM will help us understand if the USD is becoming strong or if the NZD is weakening.
The forex strength meter of a specific currency depends on your chosen timeframe. Longer timeframes ensure greater accuracy, and you can determine it through the timeframes you have set for it. For example, there may be a spike in the USD today’s time frame, but it is one of the weakest on the list in terms of the monthly analysis. Although the FSM could be helpful with these small pockets of opportunity, it’s usually best to look at a larger picture if you prefer placing longer trades.
Interpreting a forex strength meter on MT5 is not tricky. It uses a line to portray the strength of a currency, and you can solve it using some simple rules as follows. You can understand that a rising line signals that the currency is gaining strength. On the other hand, a downward-pointing line shows that the currency is weakening.
If the line is flat or almost flat, currencies hold their current strength. The indicator lets the trader know which currency is performing well at a given time and which one is not. It then helps traders create strategies by taking this information and applying it to the charts on their MT5 screens.
Most FSM indicators come with their measuring system. Generally, it will be from 0-10, but the closer it is to 10, the stronger the currency is. You have to understand that this number can go below one as well.
Mistakes to Avoid
Most beginners’ cardinal mistake when using FSM is that they only use FSM. You must pair your trading with FSM with other indicators and chart analysis. The FSM is just the foundation of your research, and it helps you filter through the currencies that are worth analyzing at a current time. Even if you know the preferred currencies, the chart will determine whether it’s worth trading them.
Another mistake is not calculating the strength of a currency compared to major currency pairs. For the USD to be strong, you have to compare it with the EUR, GBP, CHF, JPY, and other major currencies. The third mistake is using only short time frames. The FSM indicator illustrates the strength of each currency in a specific period. It’s preferred to use the FSM with longer timeframes of a couple of weeks or months timeframes for the currency to be accurate.
You also have to remember that the FSM is not 100 percent accurate, and you need to always look at what state the market is in at the moment. If it is recovering from a huge spike recently, the FSM’s data may not be helpful no matter how accurate it may be.
Trading with a strength meter can easily be disrupted when massive changes in the market. It can be a piece of news or some economic issue. Spikes and plunges always make the FSM less accurate.