Trading in the forex market is not as easy as it looks from the outside. Executing a perfect trade requires good preparation, planning, and practice, along with a solid strategy. How well you can do this depends on your market knowledge and trading skills. The skill level of forex traders greatly depends on the tools they use to get through the complex trading process. In fact, the right set of tools can simplify the decision-making process as well as the precision with which you can implement these decisions on a live trading account.
In this article, you will learn about the best forex trading tools you can add to your toolkit and how you can use them to enhance your trading skills.
1. Knowledge
Not many people think of knowledge as a tool, but in my humble opinion, knowledge is the most essential and powerful tool for anyone. Because any other tool would become useless if you don’t have enough knowledge to utilise it in the best possible way, knowledge, and skills are closely connected, and you cannot have one without the other. Market knowledge and trading skills are the very foundation of successful trading, and you won’t be able to build your trading career until and unless you spend enough time building a strong foundation. Hence, you need to start off your journey by researching and studying the dynamic forex market.
There are many fundamental and technical concepts that you need to understand before stepping into the realm of forex trading. The time and effort you put into this research and learning will surely reflect on the results you get in the end. So, you need to find reliable sources of information online or offline and attempt live trading only after gathering enough knowledge about the technicalities. Gaining theoretical knowledge is easier in the Internet age, but practical knowledge is more important to navigate the volatile currency market.
Beginners are always in a hurry to start trading, and they make many mistakes due to their inexperience. Some mistakes are inevitable when you are new to the market scene, but you can surely avoid the bigger mistakes by practicing on a demo account first, where you get to interact with the real-time market without risking real money. It is the best platform for polishing your trading skills and also serves as a powerful tool for boosting your confidence as a new trader.
2. Forex Economic Calendar
The next tool that I want you to add to your toolkit is a forex economic calendar, which can be found in many trading platforms as well as broker platforms. A forex economic calendar is used to keep track of upcoming economic events, indicators, and announcements that have the potential to impact currency prices and market sentiment. These events can include economic data releases, central bank meetings, geopolitical developments, and other factors influencing the global economy and financial markets.
The economic calendar provides a schedule of these events and the expected and actual values of the economic indicators. Traders use this information to anticipate how these events might affect currency pairs. With this, they can plan their trades in a better way and also make informed trading decisions based on fundamental analysis. Economic calendars are especially important for traders following new trading strategies that open positions based on key news events leading to currency price fluctuations.
Let’s refer to an example to understand the relevance of the economic calendar in a better way. Suppose you want to trade with the popular major pair EUR/USD, and you check the economic calendar and see that the Federal Reserve is about to announce its new interest rate revision. In this case, you can expect the pair to become more volatile ahead of the interest rate decisions as market sentiments will change based on what traders expect. Hence, an economic calendar is a must-have tool in your trader’s toolkit, as you need to be aware of all such events while trading.
3. Pivot Point Calculator
The next tool I want to suggest for your trader’s toolkit is a pivot point calculator, a tool for technical analysis used to determine potential support and resistance levels for a given trading day. Pivot points are widely used technical indicators that help traders identify key price levels around which the market’s direction might change. These levels are calculated by taking the previous day’s high, low, and closing prices. The pivot point represents the central level, and several support and resistance levels are derived from it.
Pivot levels can be used to identify potential entry and exit points and provide insights into market sentiment and potential price reversals. Support and resistance levels are always used as key metrics in the trading process, and a pivot point calculator will be a great addition to your toolkit as it allows you to make trading decisions easily. However, no indicator can be 100% reliable, which also applies to pivot points. Hence, it would be better to focus on price action primarily while using pivot points and other suitable technical indicators in moderation.
Pivot point calculations are based on various methods, the most common being the Standard Pivot Points, Fibonacci Pivot Points, and Camarilla Pivot Points. Traders choose the method that aligns with their trading strategy and preferences.
Traders use pivot points in conjunction with other technical indicators and analysis techniques to make informed trading decisions.
4. Pip & Margin Calculators
Planning and executing successful trades will not be possible without detailed analysis and calculations. We have already covered the analysis part with a pivot point calculator, and now we need to find tools for the calculation of trade-related metrics that will play a key role in the end results of your trades. In that case, the first two tools that will come in handy for trading are a pip calculator and a margin calculator.
Pip is the standard unit used to measure and track currency rate fluctuations and is often used to calculate a trade’s potential profits and losses. Traders often set their profit target as a specific number of pips, and it is also used as a metric for proper placement of Stop Loss in a trade. Now, the monetary value of one pip for a particular currency pair will vary based on your trade size, the account’s base currency and the present exchange rate, which keeps changing all the time. Hence, it will be a lot of work to calculate this manually, and a pip calculator would be perfect for getting precise results in split seconds.
The next tool I want you to use is a margin calculator, which is used to determine accurate margin requirements for a specific trade. Margin is essentially the collateral required by your broker to open and maintain a trading position. It ensures that you have enough funds to cover potential losses. For using a margin calculator, you just need to specify the currency pair you want to trade with, the desired lot size, along with the account base currency and leverage in use, if any. After that, the margin calculator will tell you the funds you need in your account to execute this trade.
5. Position Size Calculator
The last Forex tool I want to suggest adding to your toolkit is another automated calculator used for calculating optimal position size for your trades. Position sizing is an important part of risk management; beginners may be unable to determine the perfect trade size on their own. In that case, you can use a position calculator to tell you about the ideal position size based on your account balance and risk tolerance. The size of your trade positions will eventually determine the size of your profits/losses at the end of the trade.
The amount of risk you take for a trade needs to be controlled by choosing an appropriate trade size. Limiting your risk per trade to 2% of your account balance would be ideal, as it helps you keep the drawdown within limits even if you lose several trades in a row. To use a position size calculator, you just need to enter the required values such as currency pair chosen, account base currency, entry price, stop loss level, account balance, and percentage of capital you are willing to risk.
Final Thoughts
So, these are the 5 forex tools you should add to your toolkit for better trading. To sum it up, knowledge is the first and foremost tool that a trader needs to gain the power to navigate the forex market with ease. The other tools you bring to the table are there to empower yourself by enhancing your skills.
