Forex traders have a wide selection of Forex tools at their disposal, with new tools being developed all the time. This can be quite overwhelming for new traders, so it’s really important to only use those trading tools that better fits your needs as a trader, and that you can see how you would benefit from them.
In this guide, I am going to look at seven categories of the best trading tools that you might want to explore as part of your trading routine and provide an example of how each can be used.
That said, selecting your trading tools all comes down to the type of trader you are, as a technical trader may require different tools than a fundamental trader.
No matter if you’re a fundamental trader or a technical trader it’s always good to know when major risk events are scheduled on the economic calendar. This is probably the most common tool that all Forex traders will use, as it sets a structure around the day. Trading without this information would unwise.
Economic news releases are usually the catalyst for volatility in the market. It’s always good to know when to expect higher volatility because it is when the markets are volatile that traders have the opportunity to take profit.
Above is an example of a traditional Economic calendar. Each of the events listed here is going to have some impact on the market, where high impact news events are marked in red while low impact news events are marked in yellow. Here is an example of how an economic calendar would be used in your trading.
Example: A fundamental trader who pays attention to the economic calendar could have made a nice profit trading the biggest risk event – the NFP or Non-Farm Payroll report being published. Based on the market consensus traders are expecting for the US economy to add 181k new jobs higher than the previous reading of 160k.
Based on this we would have expected the US dollar to strengthen. In this example, the NFP was published and beat the market expectation by posting 200k new jobs, which was even more bullish and inevitably sent USD/JPY higher. This is a perfect example of how to use news evens to make a quick profit.
Pattern Recognition Software
Recognizing chart patterns can be a little bit challenging, but a lot can be gained from recognizing them. Pattern recognition tools are becoming quite advanced and can be used in real-time to find preferred patterns.
Autochartist is probably the most recognized software in this space. When running this software, a trader will receive alerts when a favorite pattern develops so the trader does not need to be glued to the screen and can step away to monitor other trades or do planning.
Example: In the example below, we can see the Autochartist software at work and how easily is to profit from this tool. We have two currency pairs the GBP/CAD and the EUR/CAD and two distinctive chart patterns that the Autochartist software has recognized.
On GBP/CAD we have a triangle price formation with a winning probability of 61% and potential profit targets of 1.7739. On EUR/CAD the Autochartist has identified a rising wedge formation and has given a short signal with a target of 1.5304 and a bigger winning probability of 66%.
The tool does not automatically place the trade for you, leaving the trader to remain in control, but it does a great job identifying chart patterns.
Harmonic Pattern Software
Harmonic trading is a sophisticated way of looking at the price structure in the markets. There are five different harmonic patterns that are constructed by four swing legs and that follow certain Fibonacci ratios.
Formationseeker helps traders recognize these harmonic patterns much faster. FormationSeeker is a proprietary pattern recognition software dedicated to searching for harmonic patterns in different types of markets ranging from Forex currencies to stocks and even cryptocurrencies.
Without this tool, you would need to have your eyes trained to be able to identify real-time harmonic patterns. However, with the help of the FormationSeeker software, a trader’s research job can be automated that little bit more. Formationseeker is available on subscription including a free trial here.
If you’re a harmonic trader, this is a good tool to have in your arsenal because it will take the burden off your shoulders to constantly fit the right Fibonacci ratios. In the example below, you can see the Formationseeker software at work.
Example: A bullish harmonic Crab pattern is identified on the AUD/USD 1-hour chart. Your entry point, stop loss and multiple profit targets are automatically generated by this tool. This can be imported directly into your trading software.
MT4 Supreme it’s a free plugin that can improve your experience with the MetaTrader 4 platform by improving your trading performance and surfacing the right information at the right time. The MT4 platform is the most used retail trading platform, and the MT4 Supreme plugin is a good upgrade.
MT4 Supreme comes with many added benefits, but the main features are as follows:
- Mini Terminal gives you faster trade execution.
- Trade Terminal comes with many handy tools that will make it easy to monitor all your trades in one place.
- Session Map it gives you information about each trading session individually and the appropriate news events from each trading session.
MT4 Supreme is definitely a tool that you must have if you trade through the MetaTrader 4 as your trading experience will become a lot easier and more informative.
Market Sentiment Tools
A market sentiment tool can help us measure and understand what other market participants are doing in the market. This is a very useful tool, but only if used correctly. Only use this tool to look for extreme measurements of sentiment in the market because major trend reversals occur when such extreme readings are present in the market.
The majority of Forex brokers have sentiment analysis tools that will provide you with a short summary of open positions held by their clients.
Example: Professional traders use sentiment analysis as a contrarian indicator. So, if the GBP/CHF shows that the majority of retail traders are long you want to be looking for short opportunities at key resistance areas like in the example below:
Forex Analytics – Pitview
Pitview is a trading tool that can bring your trading to the next level as it allows you to trade side-by-side with the banks. Pitview Analytics lets traders see the liquidity inside the Bid and the Ask which are the buy and sell orders of the Liquidity providers and the major market participants. This is huge for trading.
Pitview also tracks the FX sentiment of all currencies, and it provides you with a map so you know what currencies the banks are investing in, or selling off. Pitview is available on subscription with a free trial here.
Example: A good way to take advantage of the Pitview tool, is to use the FX TotalView window which shows you how strong the major currencies are compared to each of other major currencies.
For example, if your technical analysis tells you that the US dollar is about to strengthen you want to take a trade against the weakest currency if you want to maximize your potential profit. From the FX TotalView window, we can note that the weakest currency against the US dollar is the Japanese Yen. So, it makes sense to take a long trade on the USD/JPY to maximize your profits.
Forex Correlation Tools
Forex correlation tools help traders avoid taking trades in currencies that are correlated and will be moving in a ranging market absent of trading opportunities. The correlation tool will show you if one currency pair is moving in a similar way or contrary if they are moving in opposite directions.
If you enter two trades with two very highly correlated currency pairs then it basically the same as doubling your risk as you are ultimately trading the same pair since they are moving together.
Example: If you’re long EUR/USD and at the same time you have a trade signal on USD/JPY, by simply checking the correlation between these two currency pairs, you can see that going short USD/JPY is almost the same as being long EUR/USD because of the -86.2 correlation. Because of this check, you can choose not to take on the second trade.
This tool can help you to keep your risk under control by not exposing yourself to too many currencies that move in the same direction. But at the same time, you can also use this as a hedging tool because you can see the relationships of the trends.
These Forex trading tools are not the Holy Grail and they don’t have the uncanny ability to predict every single price movement in the market. But these are tools that can have a place in a well-thought-out trading plan.
Remember, that you only need to use the trading tool that fits your needs, and which can improve your trading. Just become an expert at using whatever trading tool you use, and your chances of becoming a profitable trader will increase considerably.