The use of forex analysis tools for making better trading decisions will enhance your overall trading performance. There are four primary categories of trading tools that can come in handy for traders and market participants.
- Trend analysis
- Market analysis
- Technical analysis
- Sentiment analysis
In this article, we will only discuss market analysis tools and technical analysis tools that are commonly used by forex traders.
Market Analysis Tools
Most of the market analysis tools function as standalone tools for forex market analysis and help traders with various calculations too.
Tool for measuring the correlation of Forex Pairs
A positive or negative relationship between two different currency pairs is measured with a forex pair correlation tool. Two currency pairs that move in the same direction are said to be in a positive correlation, and they will move in opposite directions when there is a negative correlation. This correlation tool will indicate whether a currency pair’s movement is following a pattern that is similar to that of other pairs, which is useful for traders since trading correlated pairs can result in lower profits.
Carry Trade Calculator
A carry trade calculator estimates the interest you will either receive or be required to pay while holding an overnight position. Your account balance will be affected by these interest payments which are also known as swap charges in forex. It calculates the amount of interest earned or paid on trades held for extended periods of time, to put it another way. Interest rate differences, trade size, and the number of days the trade is held are taken into account in the calculations.
Forex Volatility Calculator
The Forex Volatility Calculator estimates the extent to which the exchange rates can move over a specified time period. It is determined by averaging the difference between the highest and lowest prices for any given period of time. The most volatile currency pairs can be found using this tool, which can also help a trader decide where to set stop-loss and take-profit levels.
Pivot Point Calculator
In the commodities markets, floor traders created the pivot point indicator to pinpoint potential turning points. Day traders use pivot points in the forex and other markets to identify likely levels of support and resistance and, consequently, potential turning points from bullish to bearish or vice versa. Although there is a formula for manually calculating pivot points, the market analysis tool makes the process simpler and more accurate.
In any trading market, a pivot point is the point at which the trending direction of the market pivots and momentum shifts to the opposite direction.
Technical Analysis Tools
The primary tools for technical analysis are price charts and technical indicators. You can easily find these indicators on trading platforms and you can start using them by adding them to your charts. They can be divided into three categories:
- Lagging Indicators (Example: Moving Averages)
- Leading Indicators (Example: Stochastic and MACD)
- Confirming Indicators (Example: On Balance Volume)
RSI Indicator
Relative Strength Index, or RSI, is a well-liked technical indicator for spotting overbought and oversold pairs. It is a reliable sign of the market’s overall momentum. This widely used technical indicator and oscillator indicates oversold conditions when the RSI readings are below 30, and overbought conditions when it exceeds 70. The more extreme readings of 80 and 20 are preferred by some traders and analysts.
MACD Indicator
Due to its straightforward mechanics, the MACD (moving average convergence divergence) is one of the most popular momentum indicators. We have bullish momentum if the histogram reads above zero, and we have bearish momentum if it reads below zero. This indicator is used by traders to determine the market’s overall strength.
Bollinger Bands
Traders use Bollinger Bands to draw trend lines that are two standard deviations away from the price of a security’s simple moving average. By determining when an asset has been overbought or oversold, the objective is to assist a trader in knowing when to enter or exit a position. The Bollinger Bands, which are overlaid on the price, can be used to decide where to place a stop-loss order and where to take profits.
So, these were some of the most popular and commonly used technical indicators that you can consider adding to your toolkit. To sum it up, both market analysis tools and technical analysis tools are a must for making sound trading decisions. So, every trader needs to learn about them before making their first move in the forex world.