physics

Relative currency strength

Relative currency strength is a physics topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Relative currency strength rather than just read about it. In short: Relative currency strength (RCS) is the purchasing power of a currency when traded against other foreign currencies, or used to trade products. It is also a technical indicator used in the technical analysis of foreign exchange market (Forex).

Key takeaways

Relative currency strength belongs to physics; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Relative currency strength to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Relative currency strength from memory before moving on to harder problems.

Reference excerpt

Relative currency strength (RCS) is the purchasing power of a currency when traded against other foreign currencies, or used to trade products. It is also a technical indicator used in the technical analysis of foreign exchange market (Forex). It is intended to chart the current and historical strength or weakness of a currency based on the closing prices of a recent trading period. It is based on the relative strength index and mathematical decorrelation of 28 cross currency pairs. It shows the relative strength momentum of the selected major currency. (EUR, GBP, AUD, USD, CAD, CHF, JPY) The RCS is typically used on a 14-period timeframe, and is measured on a scale from 0 to 100 similar to RSI, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels—such as 80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum of currency. Combination of Relative currency strength and Absolute currency strength indicators yield entry and exit signals for currency trading.

Concept The basic idea behind this indicator is to be able to "buy strong currency and sell weak currency". If a X/Y currency pair is in an uptrend, the RCS indicator shows if it is due to either X strength or Y weakness. Using these signals a trader can evaluate and determine the most worthy pair to trade.

Application Relative currency strength can be applied for pattern analyses. Some of the basic patterns where RCS can be used are: cross, trend break, trend follow, and divergencies.

Indicator

Application for trading strategies Most commonly used in combination with Absolute currency strength. Information indicator to realize which currencies are being demanded, this is ideal indicator for trend following traders. Help for scalpers looking for strength trend (trader can see both absolute and relative strength). Instrument for correlation/spread traders to see reactions of each currencies on moves in correlated instruments (for example CAD/OIL or AUD/GOLD).

See also Currency strength Currency pair Relative Strength Index Forex Technical analysis

References

Illustrations

Worked examples

Example 1 — a first encounter with Relative currency strength

Start with the simplest possible case. Write down what Relative currency strength claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In physics, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Relative currency strength before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Relative currency strength ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Relative currency strength

In research: Relative currency strength appears in physics research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Relative currency strength in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Relative currency strength is common in secondary-school and first-year university syllabi. It links to neighbouring topics Technical indicators, so understanding it makes those chapters shorter.
In everyday life: Look for Relative currency strength outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

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How to study Relative currency strength in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Relative currency strength means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Relative currency strength out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Relative currency strength in simple terms?

Why does Relative currency strength matter?

Because it connects several physics ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Relative currency strength?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Relative currency strength.