If you ask an expert trader about the prerequisites of forex trading success, they will tell you the importance of having enough knowledge, skills and a sound strategy to follow. A trader’s skill set includes planning, decision-making, calculation, and analytical skills. Analytical skills are essential for market analysis, which is the basis for finding ideal trade setups, and how you interpret a market situation will also decide the outcome of your trade. Hence, having the right tools to analyse the market gives you an edge as a forex trader.
In this article, I will introduce you to the 10 best market analysis tools for forex trading success. This also includes basic tools for the calculation of trade-related metrics, such as a pip calculator, which can estimate the monetary value of a specific number of pips in your account currency. So, let’s dive into the details without any delay.
- Candlestick Charts
Price charts that present the market data in a visual form are the basis of technical analysis in forex, and the most common chart type used by forex traders is candlestick charts, which originated from Japan. Candlestick charts are considered to be an ideal tool for market analysis as they can give us a vast amount of information in a comprehensive manner with a lot of attention to the details. In a candlestick chart, a bunch of candles will depict price movements in a specific time frame.
We can refer to it for recognizing patterns that can be interpreted to spot market trends, trend reversals, breakouts, and more, as they provide valuable insights about openings, closings, and the highs and lows of prices. But for this, you will have to master the art of chart reading, and you can use tools like pip calculators to understand the impact of price movements as currency price fluctuations are measured in pips.
- Pivot Points
Pivot points are another relevant tool for technical analysts as they tell us about the support and resistance levels when the prices are moving. Support and resistance can be connected with supply and demand, which pressures the market to change its direction. The falling prices will start rising again after reaching the key support level, and the rising prices will start dropping after touching the key resistance level. Hence, traders rely on pivot points for finding trade setups and making trading decisions while also using other relevant tools and indicators to confirm their analysis.
- Risk Management Tools
The importance of risk management in forex trading can never be overstated, as the currency market is very volatile and unpredictable at times. Even the best trader is exposed to the risk of loss if the market becomes unfavourable, and the only thing that can save you in such a situation is a solid risk management plan. There are a lot of tools that can assist you in implementing your plan, and one of them is a profit calculator that can be used to analyze the profit amount in the currency you are looking to trade in. This will help you figure out the right lot size to use as per your risk management.
Risk management is not about avoiding risk but taking calculated risks according to your risk tolerance and profit targets. Not taking enough risk also limits your profit potential, and you need to accept that you can’t expect rewards without risk. So, you can minimise the potential losses by sticking to your risk/reward ratio, limiting the risk per trade and exiting your losing trades early by setting a stop loss. You can rely on user-friendly trading calculators to make informed trading decisions while eliminating manual mistakes in calculations.
- Moving Average Indicator
Technical indicators can be a valuable addition to your charts as they allow you to add more precision to your analysis by applying mathematical formulas. The moving average indicator is one of the most popular technical indicators used by forex traders as they are comprehensive and simple for most beginners. A moving average indicator smoothes out price data over a specified period to identify trends and reduce noise, allowing the assessment of the overall direction of an asset’s price fluctuation. Besides Moving Averages (MA), you can also consider Moving Average Convergence and Divergence (MACD indicator), an advanced indicator providing more insights about the market situation.
- Correlation Matrix
The high degree of correlation between different currency pairs distinguishes the forex market from other major financial markets. Some currency pairs move in the same direction, which is referred to as a positive correlation. When 2 currency pairs move in opposite directions to one another, they are negatively correlated. Understanding this correlation is essential when you trade with multiple pairs, as this correlation can affect your total exposure to market risk in many ways. Thus, a correlation matrix is an essential tool for estimating the degree of correlation between different currency pairs and this way, you can hedge the positions to manage the risk.
- Market Sentiment indicator
Market sentiments play a key role in currency price fluctuations, and traders can also make sound decisions by considering this metric. For this, you can use a market sentiment indicator that can tell you about the market psychology. By using this indicator, you can see if the market sentiment is bullish or bearish for a currency pair at the moment. If the majority of traders have bullish views on a pair, then the chances of an uptrend are high for that pair. Similarly, if traders are pessimistic about a pair, then we can expect the prices to fall further, resulting in a downtrend.
In order to analyse market sentiments, you can depend on various indicators such as Commitment of Traders (COT) report, Futures Open Interest and even position summaries provided by your broker. A good understanding of the market sentiments allows you to open trade positions per the existing market bias. This can be a good strategy in some situations when market psychology has the upper hand in controlling the direction of price movements.
- Stochastic Oscillator Analysis Tool
Stochastic Oscillator is similar to RSI (Relative Strength Index) as it allows you to identify when an asset is overbought or oversold. This leading indicator can change its direction prior to the actual price movement as it can anticipate potential price fluctuations using bullish and bearish divergences. It can be categorised as a momentum indicator as it measures the strength and momentum of a trend along with the speed of price action. This advanced indicator can be used to analyse the price action in the market, and you will be able to make sound trading decisions based on the information that you get from this indicator.
- Fibonacci Retracement levels
Fibonacci retracement levels have become a popular indicator among forex traders as many use it to identify potential entry and exit points in their trades. The retracement levels can be used to predict the future support and resistance levels that will be formed after a lot of movement in the market. The tool can be used to highlight the levels at which a potential reversal or consolidation can happen. As the reversal happens, you can quickly capture a few pips and calculate the pip value in the base currency of your account using a pip calculator.
- Forex Economic Calendar
Economic calendars are essential for navigating the forex market, which constantly fluctuates due to economic news and events. An economic calendar keeps us updated about important data releases and news events that can impact the forex market and may even provide insights about the possible impact of this event or news. This tool has more to do with fundamental analysis, which takes geo-political and economic factors into consideration.
This includes central bank meetings, inflation data releases, employment report releases, and GDP data releases revealing the strength or weakness of an economy, and this will be reflected in the value of a currency. Economic calendars make it easier for us to keep up with all the relevant updates.
- Trading Journals
Trading journals serve as a tool for analysing our own trading ideas and assessing our trading performance, as we will be recording all details about our trading days in this journal. By journaling our trades, we will be able to use them as a reference in the future, and it also helps us learn from our mistakes while reflecting back on our trading decisions. It would be hard to spot a mistake while we are trading, but we will be able to identify it while writing about it in a journal. This helps us to improve and grow as a trader.
Summary
So, these are the 10 best forex market analysis tools that can make trading easier and even more efficient by adding more precision and clarity. Optimum utilisation of such tools allows you to make rational trading decisions as you will be more focused on the facts and figures instead of being carried away by your emotions.