Trading in the foreign exchange market can be quite challenging for both novice and seasoned traders. This is why all forex traders with any level of success will augment their decision-making skills by using a number of FX trading tools. These tools can help traders facilitate and determine profitable entry and exit points.
Forex trading tools can either be paid for by subscribing to a service, or are offered free of charge by a forex broker, a trading platform provider, or as in the case of an economic calendar, by a significant number of websites specializing in financial and forex market news. Several forex signal trading services are also available that provide trading cues that can be helpful for novice traders.
Some of the best forex trading tools can be found within popular online trading platforms, such as MetaTrader 4. Trading platforms like MetaTrader 4 offer a comprehensive package of technical indicators, as well as trade automation abilities.
Details about some the most useful and popular forex tools for traders are discussed further in the sections below. This list includes currency trading tools that are offered free of charge, as well as those offered through various websites for a subscription fee.
Free Online Trading Tools
Some of the most useful and popular tools for traders are fundamental analysis tools that can be accessed by anyone online, such as economic news calendars. Since the foreign exchange market reflects the relative values of currencies according to the present economic conditions in each country of origin, interest rate differentials and market expectations in the forex market can have an important impact on exchange rate levels.
Other free online trading tools can be found on numerous websites, as well as incorporated into many of the currency trading platforms offered by online forex brokers. This includes MetaTrader 4, which will be covered in further detail later in this article.
Other free tools for forex traders can be readily found on the Internet at various forex news and information websites. Some of them are apps that can be used online, while others can be downloaded in spreadsheet form or exist as functions to augment standard spreadsheet programs like Microsoft Excel.
Economic News Calendar Tool
One of the most useful and popular tools for the forex trader is the economic news calendar. This list provides traders with the future market consensus, as well as previously released outcomes, for key economic data and relevant geopolitical events. It also usually lists the timing of central bank policy statements, monetary policymaker speeches and elections.
This important forex trading tool is of special interest to fundamental analysts. Economic calendars are typically offered by forex brokers and financial news websites. They generally consist of a listing of all future fundamental economic releases that will affect the valuation of a nation’s currency. This vital fundamental information is usually available on most online calendars one or two weeks in advance of the releases listed.
Most published economic calendars include the type of release, such as the Unemployment Rate for example, as well as what the previously released outcome was and the market’s consensus expectation for the upcoming release. In addition, the type of release will generally be coded in some way depending on whether it has a significant impact, a medium impact, a light impact or no impact at all.
If the economic release has a low impact, then the currency pair will typically have a small or nonexistent reaction to a deviation from the consensus, while a medium impact event will make the currency pair move to a greater degree if the result deviates from the consensus. When the number of the release is significantly higher or lower than the market expectation, especially when it comes to items with a high impact, the currency pair associated with the release tends to move more and experiences considerably more market volatility in the process.
Financial Newswire Access
As an adjunct to the economic calendar, economic news is disseminated by a wide range of financial publications.
These news outlets include such well respected financial newswires and newspaper names as the Wall Street Journal, MarketWatch, Reuters, Bloomberg, and the UK’s Financial Times, as well as other lesser known business publications and online resources.
Interest rates play a big role in the valuation of currencies, which is the reason that news from each country’s central bank and their monetary policymakers can have such a strong influence on the valuation of a nation’s currency. Reports of the speeches, official press conferences and policy statements released by these sources tend to be published quickly on the financial newswires, and they are now published promptly on the Internet as well.
Other important economic news that can affect the value of a national currency is the relevant country’s political situation, any adverse geological events, its dependence on or production of strategic natural resources like oil or gold, and the level of employment — to name only a few.
Pip Calculator Tool
Working with amounts expressed in foreign currencies can be somewhat confusing if one is not familiar with the pip valuation system. A “pip” is the lowest trading unit for a currency pair, and it is usually worth a different amount depending on the base currency and the counter currency involved.
A currency pip calculator is a forex trading tool that allows the trader to determine the amount a pip is worth based on the size of their position in their local currency. A typical pip calculator might also show the pip value for a specified currency pair based a Standard lot of 100,000 units, a Mini lot of 10,000 units, and a Micro lot of 1,000 units.
For example, a major currency pair, such as the EUR/USD pair, is conventionally expressed in U.S. Dollars per Euro. If this currency pair is trading at 1.0000, then the value of a single pip or 0.0001 U.S. Dollars/Euro, on a Standard Lot of 100,000 Euros would be worth 10.00 USD.
To use the pip calculator, a trader simply has to enter the details of their position that include the instrument or currency pair, the size of the trade, the amount of currency in the account, and the leverage and position size parameters. The pip calculator then works out the pip value of each position in the trader’s chosen currency. This tool is extremely useful to keep track of the amounts that positions are worth in the account.
The Currency Correlation Tool
Because the foreign exchange market is made up of multiple pairs of currencies, known and calculable correlations exist between currencies, which can be positive or negative, with correlations typically being more prominent in some pairs than in others.
For example, the Swiss Franc generally has a positive correlation with the Euro. Therefore, USD/CHF will have a negative or inverse correlation to EUR/USD most of the time, which means that those two currency pairs will typically move in opposite directions.
Two pairs which have historically had a positive correlation, although this has somewhat diminished recently since the Brexit event, are the EUR/USD and GBP/USD. These two currency pairs had a very strong positive correlation before the announcement of Brexit, but now they have a much weaker positive correlation.
Mataf offers a currency correlation tool that is popular among many forex traders. A Currency Correlation Tool can also be found at many online brokers’ websites and is generally offered without charge. Correlations can be listed precisely, and can also be coded in intervals. A list of possible correlation intervals from -1.0 or +1.0 is shown below:
- -1.0 represents a perfect inverse correlation
- -0.8 a very strong inverse correlation
- -0.6 a strong inverse correlation
- -0.4 a moderate inverse correlation
- -0.2 a weak inverse correlation
- 0.0 no correlation, the pair moves randomly
- +0.2 a very weak positive correlation
- +0.4 a weak positive correlation
- +0.6 a moderate positive correlation
- +0.8 a strong positive correlation
- +1.0 a perfect positive correlation
To create a correlation table, the correlation of each currency with respect to all the other currencies is computed for one or more historical period(s) and put in the box where they intersect in the table. As an added feature, many correlation tables have their computed boxes color coded where, for example, red is a perfect inverse correlation and blue is a perfect positive correlation, and the rest of the rainbow is assigned in increments to segments situated in between those correlation extremes.
Broker Spread Comparison Tool
One of the most important elements that spread sensitive traders tend to examine before selecting a forex broker is their typical dealing spreads. A tight dealing spread is always preferred by traders, since getting in and out of positions can be considerably less costly if a trader is able to execute their trades at the better exchange rates generally offered by a tighter spread.
Conversely, a wide dealing spread increases the cost of trading and can severely hamper short term traders, such as scalpers who make money by taking positions that they intend to liquidate as soon as a small profit materializes. A typical spread comparison website generally shows the spreads brokers usually quote on major currency pairs, sometimes separated by USD pairs, EUR pairs, GBP pairs, etc.
Many spread comparison websites will allow a browsing trader to filter by currency pair, session or time frame, and they give the trader an edge when it comes to knowing which broker is offering the most competitive dealing spreads. Unlike most of the tools designed for forex traders, comparing dealer spreads becomes somewhat unnecessary once you have selected a broker to operate with since switching forex brokers afterwards can be inconvenient for a variety of reasons.
Forex Time Zone Converter
The time periods that a trader chooses to be active in the forex market can make a considerable difference to their bottom line. The world’s major forex trading centers are New York, Tokyo, London and Sydney, which all operate in different time zones.
The business hours of these key trading centers also overlap to some degree, with the market opening in Sydney on Sunday at 5PM New York time, and closing on Friday at 5pm New York time.
A graphic showing the times that the forex market is open during a 24 hour period in the different financial centers around the world is a useful tool for a trader. This is especially true since the times that the markets overlap often seem to be when forex trading is most active and the market is most liquid. Trading activity, liquidity and market volatility are three important ingredients necessary for a financial instrument to be traded effectively.
Forex Volatility Calculator
As noted, one of the most important elements necessary to successful trading is market volatility. Currency pairs that have a limited range are typically not the best currency pairs to trade.
Calculating the volatility on a currency pair is no trivial matter though, and with the amount of currency pairs available to trade, calculating volatility is best left to a properly programmed computer. A typical forex volatility calculator or indicator will take historical exchange rate information and determine the implied volatility of each currency pair in real time.
A good forex volatility calculator will also break down the historical volatility into various time frames, such as 1 week, 1 month, 3 months and 1 year. This helps traders determine if an option’s volatility —and hence its price — is high or low relative to the historical volatility. It can also assist a trader to operate in the most volatile currency pairs during the time that they are most volatile, since higher volatility tends to lead to more trading opportunities.
On the other hand, a trader could choose to reduce position sizes in currency pairs with higher volatility to reduce risk as part of their overall money and risk management strategy.
Forex Trading Platforms like MetaTrader 4
MetaTrader 4 truly has no equal as one of the most popular online forex trading platforms. This comprehensive forex trading platform has a number of features that are indispensable for the serious forex trader.
Figure 1 – The primary interface of the MetaTrader 4 forex trading platform showing its charting and technical analysis capabilities, as well as its market overview feature.
As Figure 1 above shows, the trading platform includes a complete technical analysis functionality that allows traders to chart currencies in real time and apply a number of different technical oscillators and other indicators to them. It also has a fully integrated trading function that allows the trading of currency pairs directly from the charts.
Another great advantage of MetaTrader 4 is that it can be used to trade with most online forex brokers, and it has a wide community of traders using the software that can help if the user runs into problems. Automated trading and “expert advisor” software is also supported by Metatrader 4. In addition, it enables the user to employ their own parameters for both premade and custom indicators. MT4 also offers the ability to trade other asset classes supported by their online broker, including metals, energy products and stock indexes.
A demo account can easily be opened within MetaTrader, and this can give a trader an opportunity to live test and back test their strategies on previous data via the platform’s historical testing functionality. MetaTrader 4 is — without a doubt — one of the most complete and useful forex trading tools available, and it can be obtained online as a free download from its developer’s website.
Keeping a Trade Journal
Keeping an accurate record and journaling trades is a valuable way to learn from your trading. Having a recorded history of each trade, why it was initiated and the reason for liquidating the trade can give a trader some valuable insights into their trading habits.
Also, keeping a record of all trades helps a trader hone and refine their trading. Learning from mistakes and examining ways to avoid them in future are just some of the benefits of keeping a trading journal.
Most of the trading tools examined in this article can be freely obtained online, some of them via forex brokers and news outlet websites, while others can be downloaded from a developer’s website like MetaTrader 4.
Trading consistently and profitability in the forex market can be a challenging endeavor, and the fact remains that most retail traders tend to lose money in the market.
Nevertheless, with a comprehensive trading plan, the proper forex trading tools, and sufficient knowledge of the currency market, your chances of success as a forex trader can be significantly improved.