Forex traders use a wide selection of tools to analyse and trader the Forex market. Tool choice can be quite overwhelming for new traders, so taking a less-is-more approach to tools when getting started is advised.
Forex tools can be divided up into seven categories. Below is a walkthrough of each set of tools, complete with an example of how each can be used.
No matter if you’re a fundamental trader or a technical trader, it’s always beneficial to know when major economic events are scheduled to take place. Economic calendars are probably the most common tool that all Forex traders use, as it sets a structure around the day, and is the most accessible source of trading opportunities.
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.
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.
Example: Here is an example of how an economic calendar would be used in your trading. A trader could have made profited handsomely by trading the most significant risk event – the monthly Non-Farm Payroll (NFP) report release, which is the US Department of Labor national job growth indicator. Market consensus is that the US economy was going to add jobs, but adding 181k new jobs was higher than expected, and higher than the previous reading of 160k. Since the NFP data surpassed expectations, the USDJPY made a quick movement to the upside. Additional NFP research is available from 3rd party organisations like ADP research.
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
Advanced pattern recognition tools, used to find preferred patterns in real-time across all currency pairs simultaneously, are becoming more common.
Autochartist is probably the most recognised software in this space, as brokers widely offer it as a perk. The stand-alone software, or MT4 plugin, send alerts to the trader as trading opportunities when a pattern develops.
Example: These are examples of Autochartist software alerts. We have two currency pairs, the GBPCAD and the EURCAD and two distinctive chart patterns that Autochartist has recognised. On GBPCAD, we have a triangle price formation with a winning probability of 61% and potential profit targets of 1.7739. On EURCAD 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.
Harmonic Pattern Software
Harmonic trading is a sophisticated way of looking at the price structure in the markets. It is a new and exciting area of technical analysis that utilises the powerful synergies of Fibonacci measurement techniques to quantify specific price patterns (Harmonic Trading – Volume 1 – 2010 – Amazon.com). There are five different harmonic patterns that are constructed by four swing legs, and that follow specific Fibonacci ratios.
Formationseeker is a subscription software that recognises these harmonic patterns. 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 cryptocurrency crosses.
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.
Example: A bullish harmonic Crab pattern is identified on the AUDUSD 1-hour chart. Your entry point, stop loss, and multiple profit targets are automatically generated by Formationseeker, which can be imported directly into your MT4 trading software.
MT4 Supreme Edition
MT4 Supreme Edition is a free plugin developed with Admiral Markets to improve the use of existing MT4 features. The MT4 platform is the most used retail trading platform, and the MT4 Supreme plugin is an excellent upgrade for those already trading with this broker.
MT4 Supreme upgrades most existing features, but the main features are as follows:
- Mini Terminal makes opening trades and trade management easier.
- Trade Terminal comes makes it easy to monitor all your trades in one more complete dashboard.
- Technical analysis tool improvements by incorporating Trading Central into the platform.
Market Sentiment Tools
A market sentiment tool helps traders understand what other market participants are doing in the market. 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 summary of open positions held by their clients, but the limitation of the tool is that it only applies set of traders at a single client.
Example: Professional traders use sentiment analysis as a contrarian indicator. So, if the GBPCHF 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 subscription trading tool shows how big banks are trading. 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.
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: An excellent 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 the other major currencies.
If your technical analysis tells you that the US dollar is about to strengthen, you want to make a trade against the weakest currency to maximise your potential profit. From the FX TotalView window, we note that the weakest currency against the USD is the JPY. So, it makes sense to take a long trade on the USDJPY to maximise your profits.
Forex Correlation Tools
A correlation tool help traders avoid making trades in currencies that are correlated. Correlated pairs will move in a sideways ranging market absent of trading opportunities. Note that, if you enter two trades with two very highly correlated currency pairs, it would be the same as doubling your risk as you are ultimately trading the same pair.
Example: If a trader goes long on EUR/USD and at the same time you have a trade signal on USDJPY, by simply checking the correlation between these two currency pairs, you can see that going short USDJPY is almost the same as being long EURUSD because of the -86.2 correlation. Because of this check, the trader can choose not to take on the second trade, and avoid the additional risk.
A Forex correlation tool can help you to keep your risk under control by not exposing yourself to too many currencies that move in the same direction. Correlation tools can also be used as a hedging tool because traders can see the relationships between currency trends.