The life of a Forex trader is full of unpredictable events. You never know when a central banker says something that moves the market. Therefore, the need of having a set of Forex trading tools arises.
Before anything, don’t think of Forex trading tools as being only technical ones. Instead, think of the sum of elements that help a Forex trader.
For instance, keeping a Forex trading journal. It may appear like a cliché, but it helps. A lot.
A Forex trader ends up knowing him or herself more, this way. And, this is just an example of proper Forex trading tools ignored by today’s traders.
Because this is a vast subject, here’s what we’ll cover in this article:
- Forex platform
- how to pick the best one
- Forex trading tools that come with the default settings
- best Forex trading software
- advantages and disadvantages of using one
- Forex charts
- types of charts and what to do with them
- the importance of keeping Forex notes
- paper-trading as part of a Forex trading journal
- understanding Forex candles strategies and their advantages against classic technical analysis patterns
- why keeping up with Forex blogs is a mandatory condition to successful trading
- Forex record of capital when using a demo account
Above all, this article is about what are the tools that will help Forex traders succeed. And, how to make the most of them.
The funny part is that most of these Forex trading tools mentioned so far are taken for granted. Traders laugh when here about a demo account.
Why would anyone need a demo account anyways? Let’s jump to real action!
Well, this is how losing the first trading account starts. Do I have your attention now?
The Forex Platform Part of the Most Important Forex Trading Tools
One of the first things to check before trading with a broker is the trading platform. It is equally crucial for both experienced and newcomer traders.
When deciding to open an account with the broker, the Forex platform is critical. For instance, most retail brokerage houses, if not all, offer the MetaTrader4 platform.
Or, the newest version of it: MetaTrader5 or the MT5. Despite being similar in most ways, some essential restrictions do exist.
For instance, the MT5 platform forbids hedging. As a strategy, hedging is part of money management.
It helps a Forex trader cope with difficult times. Or, to cope with markets going against you.
But, hedging also works when trading a multi-timeframe Forex trading strategy. One goes long on five-minute, short on the hourly, and so on.
However, in some parts of the world regulation is tough. For instance, in the United States, hedging on the same trading account is impossible.
Moreover, traders must use a rule called FIFO. It means First In First Out, and the MT5 has it inbuilt. Not the MT4, though.
The Forex trader used with the MetaTrader4 and 5 platforms will avoid trading with other brokers. After all, the MT4 allows importing the profiles, analysis, and so on. Moreover, traders already know all the Forex trading tools it offers.
Some brokers, though, choose to invest in a built-in trading platform. And, it has some advantages over the licensed ones:
- easier customer retention
- easier implementation of custom indicators
- custom-made Forex trading software
- unique market conditions
On the downside, building and maintaining a custom platform costs money. A lot of it.
As such, brokers sacrifice short-term rentability over long-term investment. When money is not an issue, it may be the best solution for a Forex trader.
Technical and Fundamental Forex Trading Tools
Trading comes at the end of a technical and fundamental process. When both align in the same direction, the Forex trader is usually right.
The fundamental analysis ends up with the reason why the market moves. And, technical analysis with the direction.
When combining the two, the Forex trader gets closer to the price and time components that make the perfect trade.
Technical Forex Trading Tools
Anything you can imagine from a technical point of view fits into this category. The following are part of any Forex platform:
- types or charts
- trend indicators
- Fibonacci tools
- Time zones
- Gann tools
- Andrews’ Pitchfork
Any technical analysis needs Forex trading tools to help make the forecast. More precisely, to help analyze historical prices. And, to forecast future ones.
Fundamental Forex Trading Tools
While a bit confusing, the Forex trader has access to fundamental Forex trading tools to. How about the economic calendar, for instance?
Why Keep an Eye on the Economic Calendar
A great trading tool, it keeps a disciplined approach to trading. Yes, it does!
For instance, imagine the ECB (European Central Bank) week comes, and it’s only Monday. One may want to buy or sell the Euro aggressively. However, the problem is, the Euro won’t move until the ECB press conference gets underway.
Hence, the economic calendar spares money from avoiding overtrading. It also keeps the trader informed about possible upcoming news to influence markets.
But, sometimes, the Forex trader sees the market moving for apparently no reason. What to do about it? Where to go to find out if it is a fat finger quickly? Or, something extraordinary happens?
Turn to Twitter
Believe it or not, there is a strong finance community on Twitter. The so-called FinTwitt community knows everything.
Because everyone sends a tweet when something happens anywhere in the world, Twitter is a handy solution for the Forex trader to understand what’s happening.
Forex Trading Software to Help A Forex Trader
21st-century trading is about speed first. Capital second.
Huge companies with vast resources fight for a relatively constant number of retail Forex traders. Even if the number of retail traders coming to the currency market keeps rising, many quit fast.
Statistics won’t help. Most retail traders lose their first deposit due to lack of experience, trust, capital, and so on. So, they just quit.
The ones that decide to give it another try look for help. There are many companies out there offering Forex trading software.
Some for free. But, some for money. Nice money. If it is worth or not, that’s another story. What matters is that many traders find it comfortable to use Forex trading software from a reliable company.
Because sometimes the software comes with a Forex trading strategy included, a Forex trader inclines to spend some money on it at least once in his/her trading career.
Brands like the Ninja Trader, eSignal, ProfitSource, MetaStock, transformed almost overnight in must have for the retail Forex trader. However, one needs to know the drawdowns of using such software too.
For instance, all these houses offer little or nothing for free. Or, if they offer something for free, it is just the basic stuff.
Want access to more markets? It comes with a subscription.
More data needed? How about a subscription?
Furthermore, almost always there seems to be a better version of the software under development. Hence, the trader becomes captive in the universe. And, a cash-cow for the software company.
The advantage is that traders use proved methods. And, by respecting the rules, they quickly spot good trades. That is if market conditions don’t change in the meantime.
The Importance of Trading a Demo Account First
Never underestimate the importance of trading a demo account! Every retail Forex trader knows that. Yet, few follow this simple, but practical advice.
How to get accustomed to the currency market if not testing it first? And, this is valid for both experienced and newcomers.
For newcomers, trading for a while with a demo account helps to know the Forex trading tools available. Moreover, they get familiar with the Forex broker’s offering.
Nowadays, it isn’t just about currency pairs anymore. Instead, brokerage houses extended their services into other markets too.
Thanks to CFD’s (Contracts for Difference), traders have access now to markets like gold, silver, oil, individual stocks and indices, and even bonds. What’s more important: all under the same roof.
With a demo account, a retail Forex trader learns everything about the products offered:
- Margin needed
- Minimum trading size
Armed with the info, traders make the transition to a live account easier.
The major drawdown of using a demo account is that it can’t replicate the live environment. More precisely, the emotions involved.
There are no Forex trading tools to handle the emotional rollercoaster. Except, perhaps, money management if applied correctly.
Even so, on a demo account, there is always the feeling that everything is fake. A loss is not really a loss, while a winning trade doesn’t give any kind of thrill. Hence, traders avoid it.
However, while all this is true, the learning part remains valid. The best way to learn how to use all the Forex trading tools available is to trade for a while in a demo account.
Manually Back-Test a Forex Trading Strategy
Sometimes a Forex trader must do things on his/her own. Nowadays, the computer does almost everything.
However, some things need to stay as they were. Like, for instance, testing a Forex trading strategy. Manually! But why?
One of the Forex trading tools mostly used these days is automated trading. Almost eighty percent of trading takes place in such a way.
As such, all trading platforms offer the possibility to automate a strategy. All a Forex trader needs is an idea. Next, he/she builds a strategy.
Naturally, it follows a money management system. With solid risk-reward ratios and all.
Finally, the trading platform automatically tests the strategy. It takes place in a matter of minutes.
For a Forex trader, the results mean everything. However, the danger is, it won’t contain all the relevant info.
When back-testing a strategy automatically, and intended to trade it manually, almost always there’s a problem of execution. Namely, human trading can’t match the robots.
Moreover, going manually over the entries for a period in the past offers solutions to unforeseen problems. Because the market changes all the time, traders improve their strategy continually. What better way to do that then going manually over the entries and exits and taking notes to develop the strategy?
The Beauty of Paper-Trading – How it Helps a Forex Trader
Paper-trading is even better. One of the most underrated Forex trading tools, paper-trading builds trust.
Sometimes, trust is all a Forex trader needs. Paper-trading is like keeping a Forex journal for fictive positions.
This is how traders build and probe the money management system that suits best the strategy. For instance, many traders risk a specific percentage for any given trade.
The standard is one percent per every trade. With that risk, even a terrible losing strike like over seventy consecutive trades in a row, won’t kill the trading account.
In fact, it will only decrease by half. However, experienced traders will have a difficult time reaching such “performance.”
Hence, they may want to increase the risk. But how to know what percentage works best if not trying all kinds of scenarios first?
Forex blogs help too. Sometimes, some trading strategies seem so easy that it looks like everyone will make money.
The reality is that the Forex trader should know fantastic results do not come easy. And, most likely, the reason why the strategy won’t work is easy to find.
The best example comes from using indicators that repaint. Repainting means that the previous levels will change based on future ones.
One indicator that repaints is the ZigZag, for instance. A terrible mistake is to use it by placing the stop-loss at the highs or lows with the idea that those bottoms or tops are in place.
Because it repaints, it’ll change the levels all the time. In other words, it shows only temporary conditions. When the market changes, results will change too.
Monthly is King – Using Big Timeframes as Forex Trading Tools
Last but not least, the big timeframes filter the noise. Often during the trading day, some central bankers say a thing, politicians say something else, and the market trips stops on lower timeframes.
However, keeping the focus on the bigger timeframes keeps the Forex trader disciplined. The monthly is king, as they say.
Forex candles on the bigger timeframes reinforce an opinion. What seems like a catastrophe on the lower timeframes, most likely is just a pullback on the monthly chart.
Japanese candlesticks patterns are effective Forex trading tools to use on the more significant timeframes. Think of a hammer, for instance.
For a reversal pattern, it takes only one candle to reverse prices. However, most of the times the bears won’t give up the battle that easy.
As such, when the monthly candle ends, the next month the market will try to break the hammer’s low. It is usual for the price in the candle that follows the hammer’s formation to retrace between fifty-percent and 61.8% of the hammer’s full length.
Now, if the Forex trading strategy comes from a big timeframe like this one, the pullback looks disastrous on the hourly chart. However, it is just an opportunity to buy into the pullback based on the monthly timeframe’s pattern.
Traders love Japanese candlesticks patterns. Especially on the bigger timeframes.
The reason for that comes from the fact that they take little time to form. When compared with the classic patterns (e.g., head and shoulders, wedges, triangles), Japanese candlesticks patterns took one, two or sometimes three candles. That’s it!
Hence, Forex candles belonging to this category are fabulous Forex trading tools that keep traders on the right side of the market.
Every Forex trader has his/her own way of approaching the market. Some with more confidence, usually after putting many “screen hours” and watched the market.
They gained experience and, as such, they trust their strategy. They optimize the Forex trading tools in such a way that leave nothing to chance.
Other traders, especially rookie ones, look for the holy grail. Well, it doesn’t exist.
Instead, an optimal combination of Forex trading tools may give results. As conditions aren’t equal for all traders, the tools differ from Forex trader to Forex trader.
To sum up, the Forex trading tools to use are of different kinds. Some technical or fundamental, and some that fit into categories already mentioned in this article.
However, that’s not all. Plenty of other exist, and with various parameters to optimize.
Let’s talk about time, for instance. In trading, time means the availability to trade. Can we optimize it? Yes, we do.
But time also is part of some trading strategies. Usually, when combining both price and time, the resulting trade is more relevant.
For a Forex trader, every aspect covered in this article is important. At some point in any trader’s career, they played a crucial role in the trader’s evolution.
It all stops when the Forex trader picks only the Forex trading tools that fit his/her trading style. That’s when real trading begins.
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