5 Most Effective Analytical Tools for Forex Beginners
Forex traders of all levels need smart tools to enhance their decision making. These tools can help them gauge market sentiment and find trading opportunities. Also important are tools that ensure good risk management to limit losses during market downturns.
While there are plenty of resources available online, the best brokers offer the most effective and relevant tools, based on your trading experience, risk profile and trading style. This is important, since it ensures compatibility with your trading techniques.
Here are some smart forex tools that beginners can use to augment their trading performance.
1. Economic Calendar
Currency traders need to stay tuned to geo-political developments and breaking news. Such external events impact the market and can lead to price fluctuations. Traders closely study economic data of a country to estimate the viability of its currency for future investments. This is why the days leading to the release of key economic data tends to spark market volatility. Many traders might close their pending orders before a market event, leading to a drop in liquidity. Vital release dates are available on economic calendars, one or two weeks in advance.
Economic calendars provide the consensus expectations, past figures and actual data in real time. When the actual data release is significantly higher or lower than the expected figures, especially with respect to a high impact data release, a trader can be prepared for high price volatility and plan their positions accordingly. This could be helpful in avoiding sudden losses. Important data releases to track include:
- GDP data
- Interest rate announcements by Central Banks
- Inflation rate
- Retail sales data
- Unemployment data
- Manufacturing indices
- Balance of trade
2. Forex Pip Calculator
Beginners might be confused about how much capital to risk per trade. This could impact their decisions. For instance, traders might pull out of positions too soon, before the target price is reached. A forex pip calculator could be a good tool to estimate the risk per trade. Pip or point-in-percentage represents the lowest degree of change by which currency prices fluctuate. This is standardised to help traders make informed decisions. For US Dollar-based currency pairs, the pip is $0.0001.
By entering position details like lot size, choice of currency pair, account currency and leverage ratio, traders can determine the value per pip in their chosen base currency. This makes it easier to evaluate whether a trade is worth the risk.
Pip value is calculated as: (One Pip/Exchange Rate) x Lot Size. Most pip calculators provide live exchange rates.
3. Technical Indicators on MT4
One of the most popular forex trading platforms is the MetaTrader 4 platform. It offers a range of functionalities, including highly useful technical analysis tools. These technical indicators are based on mathematical calculations, based on past and present price movements. Using such tools, traders can find suitable trading opportunities, as well as points where stop-loss orders can be placed.
There are more than 50 technical analysis tools and other analytical objects on the MetaTrader 4 platform. However, some might be complex for beginners. Tools like Moving Averages (MA), Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI) tend to be preferred by beginners. MT4 also has strong charting capabilities. Together with technical indicators, charts can be used to back test strategies, to understand how they will perform in live market scenarios. An MT4 demo account could be ideal for testing strategies.
4. The MT4 Accelerator Tool
Blackwell Global has integrated a range of tools into the standard MT4 platform, including a sentiment monitor, alarm manager, correlation matrix and market manager. These individual tools are of institutional quality and come as an addition to the existing system features.
The Sentiment Monitor helps to see the overall market sentiment by taking into account the number of long or short positions for a pair. Traders can use this app to see a graphical representation of the historical sentiment, plotted against price movements. The Accelerator tool has a Session Map, to allow a beginner to understand the global forex trading markets in session. In addition, markers for future news events and an overview of currency pair performance in each session are also embedded.
The Correlation Matrix shows currency pair correlations. Currency pair correlation is a measure of the degree to which price movements between two currencies move in the same, opposite or completely random directions in a certain timeframe. By knowing these correlation values, traders can see how much risk they are exposing their trading accounts to with each trade.
5. The Trading Diary
Disciplined traders have a habit of recording their trade decisions, so that they can reflect on them to improve their strategies and learn from mistakes. The Blackwell trading diary is one such trading discipline tool that can provide traders information on their most successful strategies. For instance, traders can see which time of the day generates best results or the best and worst trades made in the past. This can help with future decisions. Similarly, observing how the P/L is impacted by certain habits or decisions, can help traders fine tune their strategies. The tool can be used to segregate trading activities, based on multiple parameters, such as P/L impact, dates, position sizes and price executions. This information could also offer a way to understand one’s patterns in decision making.
Forex trading has evolved greatly in the past decade or so. There are a number of tools available in the market today. If you trade with a regulated broker, you can be assured of the safety and stability of these platforms. With a sound trading strategy and support of smart tools, you can enhance your performance in the market. Before using them live, consider testing them on a demo account, to stay assured of their robustness.