The Forex Heatmap is a tool that traders use to indicate the strength of a trend in a currency pair. It is coded in MQL4, which is the programming language used to code technical indicators and automated trading strategies for the MetaTrader 4 trading platform.
What is the Forex Heatmap?
The Forex Heatmap compares the strength of one currency against another currency using parallel and inverse analysis. Parallel and inverse analysis use the two currencies you are looking to trade along with other currency pairs to ascertain whether the currency you are looking to buy or sell is strong or weak across the whole of the financial markets. If the analysis results in favor of your trade, it increases the likelihood of the trade being profitable.
How it Appears
The Heatmap appears as a list of the 28 major currency pairs. The eight major currencies that are used to create these pairs are the U.S. dollar, USD; the euro, EUR; the Swiss franc, CHF; the British pound sterling, GBP; the Canadian dollar, CAD; the New Zealand dollar, NZD; the Australian dollar, AUD; and the Japanese yen, JPY. Beside each currency pair the Heatmap assigns a colored box, the size and color of which represents the strength of the two currencies against each other. There is also a percentage figure, which shows the percentage change in price of the currencies. For example, if the pair in question is the EUR/USD, the reading might be 1.05 percent and the box might be relatively large and green. This would indicate that the EUR is stronger than the USD and the EUR has appreciated 1.05 percent against the USD.
Using the Indicator for Buy Signals
When the Heatmap calculates that one currency in a pair is relatively strong against the other, while also being strong against the rest of the major currencies, it will issue a buy signal. The buy signal appears as a small green arrow next to the currency pair to which it relates on the Heatmap. When a buy signal is generated, this indicates that the currency in question is likely to strengthen further, and that by buying it, you possibly could profit from this strength.
Using the Indicator for Sell Signals
Conversely, when the Heatmap calculates that one currency in a pair is relatively weak against the other, while also being weak against the rest of the major currencies, it will issue a sell signal. The signal appears as a small red arrow next to the currency pair to which it relates on the Heatmap. When the indicator generates a sell signal it suggests that the currency in question is likely to weaken further, and that by selling it, you may be able to profit from this weakening.
Samuel Rae is an experienced finance journalist whose work has been published across a range of different sites and publications in the financial space including but not limited to Seeking Alpha, Benzinga, iNewp, Trefis and Small Cap Network. He holds a BSc degree in economics.