What is forex trading?
To understand the tools used for forex trading, you must first get familiar with what forex trading entails. Forex in full is known as foreign exchange. Foreign exchange means to exchange one currency for another.
How does forex trading work?
Let us take an example; to buy a commodity in another country, you have to use the currency of that country. To do that, you have to buy foreign currency using your currency. This exchange is done in a forex market which can get accessed on the internet.
The currencies are listed in pairs like USD/EUR with a price of 1.9093. This example shows that to buy 1 USD you will need 1.9093 Euros. This price is known as the exchange rate.
Some traders can predict when one currency can grow in value against the other. They find the best price in the market to buy the strong currency. They then trade the currency to the one that has dropped in value making a profit. This is what is called forex trading.
What are the advantages of Forex trading?
Anyone can trade in forex
Trading forex is not reserved for certain individuals in the financial markets. Anyone who can get funds for as low as $500 can do it. It requires knowledge about the market and sufficient resources which you can find on the internet.
Liquidity
The market for foreign exchange is very liquid. There are always exchange currencies in the forex market. People are constantly buying and selling goods and services internationally. The market is always present to buy or sell.
Low commissions
When exchanging one currency to another, forex brokers charge using the spreads. The spreads depend on the value of the currencies exchanged. The spreads are derived from the buying and selling prices and are in form of pips.
It is an independent market
The forex market is not the property of any government or parastatal. This means that you do direct transactions via the brokers. The prices are affected by external factors like the economy. The market is free from third parties like governments and banks.
Access to leverage
Leverage is like a loan that you guarantee with the amount of deposit that you put. It has different rates, and in the forex markets, you can get leverage for up to 1:500.
It means that you can multiply the funds you use for trading 500 times more. Leverage is risky, but you can make a huge profit.
Technology
Forex trading has grown over the last 20 years because technology has advanced. There are more brokers and trading platforms compared to before the internet. The technology is faster and easier to operate.
Furthermore, adverts on the internet have led to an increased volume of traders. Trading forex is more accessible and easy thanks to technology. There are faster internet connections and less risky trading methods like automated trading.
It is secure
There are independent organisations that regulate the trading brokers and platforms. The regulation is there to ensure secure transactions. It also serves to license brokers and to stop fraudsters and malicious brokers in the market.
They are different in each region and country. In the USA they have the Commodity Futures Trading Commission CFTC. There is also the National futures association NFA. While the UK have the Financial Conduct Authority FCA.
Volatility
Volatile markets are a good thing for forex. They offer a chance to profit from short-selling or long selling a currency pair. Volatility could also cause significant losses. Not all currency pairs are volatile, some of the most liquid currencies tend to be less volatile than those not liquid.
What is a forex trading tool?
Now that we have a concept of forex trading and how it works, we can get to forex trading tools. A forex trading tool is all materials you need to make an efficient and profitable trade. The tools range from trading software to news and sources of information. These tools are there to make accurate technical and fundamental analyses.
What tools do forex traders use?
There are many tools in the market that forex traders apply when researching and trading. These tools are there, for any trader to make forex trading a lucrative trading activity. Here is a list of 9 most used tools by forex traders:
Charting software
Charting software is a visual tool used to understand price trends for different forex pairs. Traders use it for technical analysis to predict the price movement of a specific forex pair.
Charting software is a tool that helps understand the historical prices of a forex pair. Sometimes you can use the previous performance of a forex pair for analysis. Forex traders compare and forecast the movement of the trend for some time.
Charting software offers different types of charts for forex trading. Examples; candlestick patterns popular in forex, line charts and bar charts. Depending on the broker you are using, charting software is free, or you can access them for a fee.
Trade journal
Many people do not know that traders need to have a trading journal. It is for tracking the status of your trading progress. For forex traders who want to succeed in forex trading, the journal is a great tool to start using.
A trading journal will help you to:
- List down the strategies you are using.
- Keep track of the transactions that you have made.
- Discover which forex trading strategy best suits you when trading.
- Help you organise yourself when forex trading.
- Give you a plan to follow when forex trading.
Trading journals help to build discipline when trading. Besides that, you can record your trades for record-keeping. When stuck during the trading, refer to previous mistakes made and get the solution.
Economic calendar
An economic calendar is a list of economic events for a country listed on a financial website. These events help traders establish the trading strategies and methods to use. The economic events could be a new interest policy implemented.
They can also announce big news from the world bank and any financial institution. All this information gets recorded in the economic calendar. The events can be listed to take place in the future, or they can be ongoing.
This news helps investors and forex traders to know what to anticipate when trading. It is a crucial tool used for technical analysis. This information is not limited to banks and financial policies. Other factors affect the value of a currency, like bilateral trades between countries.
Currency correlation
Currency correlation is how the value of two currencies in a pair relates with another. Tow currencies get paired according to how their values change in the forex market. There are three ways that currencies correlate.
In the forex market, the expression of the correlations is negative or positive. For example, +1 means that the correlation is positive. -1 means it is negative, and 0 means no correlation. Traders interpret this information using a correlation table.
- A positive correlation means the value of the currency pair increases or decreases in value simultaneously. A positive correlation in a currency pair can lead to either massive losses or massive success when trading.
- A negative correlation shows that the value of one currency increases while the value of the other currency decreases. These types of currency pairs get traded through shorting the weak currency.
- A zero correlation means the currencies don’t have any predictable movement. They have no particular tendency to move positively or negatively.
Time zone converter
The trading market is usually open 24 hours, 5 days a week. It is closed on weekends. The reason why it is open for 24 hours is that different countries have different time zones. When the market is open, in one country, it is closed in another.
The market is open for 24 hours but it’s more active when the main markets open. The trading periods when there is liquidity happen in four sessions. The Sydney session, the Tokyo session, the London session and the New York session.
When these markets open, the trading volume increases. This is when forex traders should make the most profitable trading. This is where the time zone converter helps. A time zone converter is a tool that assists traders to know when a market is open.
It does this by showing you which market has just opened in your local time zone.
Forex Volatility calculator
A volatility calculator is a forex tool that traders use to find out the history of the currency pair. This tool calculates the volatility through thousands of data about the currency pair. It uses a calculation derived from the value of the exchange rates and the change with time.
To use this tool, traders need to input the time frame they wish to study the volatility. The forex volatility calculator will then calculate the exchange rates. It could give the rates for days or weeks at which the trading took place.
It gives the trader insight into the volatility of the currency pair. It is a very efficient tool when any forex trader wants to foretell the price movement of a currency pair. Forex traders use this tool during technical analysis.
Financial news
Financial news is a needed tool in forex exchange. The financial news from financial institutions of a country impacts forex exchange indirectly. Countries with the highest GDP have their currencies as major currencies in forex.
These countries are like the United States, United Kingdom, China and other countries. The investors closely monitor the financial news from these countries. The Financial News is part of fundamental analysis in forex.
Some main factors to pay attention to include;
- Announcement on interest rate changes
- Changes in the rate of unemployment of a country
- Any new announcements from the central bank
- News on trade between countries
These are some of the news that investors pay attention to. Forex traders use the market reaction to the financial announcements to base their decisions. The market reaction will affect the price movements of currency pairs.
The market participants can decide to sell or to buy a forex currency. This is why a forex trader has to be fast when analyzing the market.
Copy-trading
Copy trading is when a forex trader copies the trading strategies of another trader. The novice Forex trader copies what a professional forex trader is doing live as they trade. Copy trading is a forex trading tool that many new forex traders use to learn how to trade in forex.
Forex traders who wish to use copy trading should keep in mind three things when choosing a copy trading broker;
- The efficiency of the trading software.
- Information about the experienced trader you want to copy.
- Another factor is support from the customer care team.
To copy trade, you need a fast platform that has no latency so that you can execute trades as fast as you can. You also need to have information about the expert you are copying. You need personal data and their trading records to verify if their reliability.
The customer care team plays a key role. They should be able to help you in case you get stuck. A fast and responsive team should suffice. Copy trading is not all about only copying the strategies. A forex trader can also make the changes when they feel like it.
Ensure to diversify your portfolio when you copy trade. This is to spread the risk and balance your profits.
Copy trading is available with many trading brokers. Some include Vantage FX, Roboforex, Markets.com and many other trading brokers. New traders can use this tool to get the experience they need before setting off on their own.
Pip calculator
A pip calculator is a tool that helps a forex trader to know the value of the position. That is the value in pips in their local currency. Many forex traders have a hard time comprehending the concept of pips when forex trading.
A pip is the lowest unit of currency in a currency pair. The pip is different with different currencies. It is expressed as 0.0001 of a currency. For instance, a EUR/USD pair traded at 1.0000 means that one pip is 0.0001.
So that, if you are given a lot of 10,000 Euros, then by multiplying it with 0.0001, they will be valued at 1 USD. This tool assists to monitor the position that you have opened. It also assists in making better trading decisions based on how much you want to risk.
The pip value calculator requires you to fill in the information before it calculates. A currency pair, the volume of the trade-in lots, the number of funds in the account and the leverage placed. The tool then calculates the value of the pips in the currency that you want to know. It is a key tool in forex trading.
What is forex trading software?
These are computer systems designed for traders to access the market for trading. They are a place where a trader can open, manage and close a position with the help of a brokerage firm.
Trading software is a crucial trading tool when it comes to trading. An important decision that a forex trader has to make is how to choose trading software. The best trading software will ensure a trader has a pleasant trading experience.
They can be a web-based version, a mobile application and a desktop application. They are tailored to meet the demands of traders wherever they are.
When we talk about trading software, we are talking about trading platforms. They are what links the trader to the market. There are many types of trading platforms that traders use today.
What should you consider when picking a trading software?
Reliability
The trading platform should help you achieve your objectives for trading without a hustle. When you choose a trading platform, check if it can deposit and withdraw efficiently.
How long do the transactions take to reflect on the platform or to disburse funds to your account?. These are crucial aspects to look at because they can be an inconvenience when you urgently need some funds.
Another factor is the performance of the trading platform. It should be peak performance with instant execution rates. When trading forex or any other stocks and indexes, you can profit or lose within a second.
These factors should be at the back of the mind of anyone considering choosing a broker.
Features
The features offered are different with each trading platform. The features assist a trader when using the platform. It should simplify the trading process.
Some features to pay attention to are the research features. Whether they get news or information about whatever you want to trade. The tools offered for trading to keep up with the market.
The platform should be user friendly for all forex traders, new or experienced. It should be easy to navigate through the trading platform, without any challenges.
In your first attempt, it is important to look at the level of functionality. If you feel some form of difficulty with its features, shift to the next.
Fees
Trading fees is another aspect to consider. Trading fees determine the number of profits you expect. High fees can hinder you from increasing your profits, especially if you are a scalper.
Other than the fees, some platforms have a minimum required deposit they need. You can research the different trading platforms, and how much they require before deciding on a trading platform.
While still on the fees, the leverage is something a trader would consider using at some point when trading. Some trading platforms offer high leverage rates, and others low. You can choose according to your preference.
Also, look at other fees like if the platform has a trading fee or a transactional fee. Some trading platforms have hidden fees.
Safety
The trading platform should be registered and licensed for trading. Many trading platforms have come up on the internet claiming to give profits. To prevent falling into these types of scams, you can check the trading license.
Compatibility
Some trading platforms consider having specific brokers when trading. They can allocate you to a trading broker of their choice. If you have already settled with a trading broker, you can check if they are compatible.
The compatibility is such that it is easy to deposit and withdraw funds when trading. The customer care team is there to clarify any issues if needed.
What software do trading forex traders use?
Forex traders use trading platforms to trade in the market. There are two types of trading platforms that traders can use for forex trading.
Manual trading platforms- forex traders use them to trade the forex market manually. Traders rely on forex analysis and technical indicators. They place the trades themselves and
Automated trading platforms- come from developed algorithms that traders use when trading. These algorithms allow users to trade on autopilot. Forex traders use automated trading platforms that are efficient and accurate than manual trading.
Automated trading platforms can also come as features on manual trading platforms. There are many examples of forex trading platforms. Some include; e Toro, Ava trade, OANDA, Meta trader 4, Meta trader 5, IG and other trading platforms.
All these trading platforms are popularly known and used for forex trading.
Which is the best trading tool?
When it comes down to the best trading tool, all trading tools are the best. They all play a part in making the trading process simple. However, Meta trader 4, and Meta Trader 5 trading platforms are the best.
It has features that allow you to access all the forex trading materials you need. It is a free trading platform, and in addition to that, it is easy to set up and use. Its web-based version has the best functionality to trade the currency market.
Meta trader 4, known as MT4 got designed for forex trading. Meta trader 5, known as MT5, is faster than meta trader 4. But it has the additional ability to trade another portfolio like stocks, futures and forex. They have an instant execution rate that will remove lagging when forex trading.
MT4 and MT5 have features that rank them as the best tools for trading forex. They have charts that can provide up to 9-time frames for the MT4 while 21 for the MT5. Besides, they also have a research tool to perform fundamental and technical analysis.
Forex traders have access to the latest news through the web-based version to make trading decisions. They offer a web-based version, the desktop version or the mobile application.
Conclusion
All these tools are enough to make trading fast and easy. As technology advances, more trading tools will be added and most if not all traders will get to use them. What sets apart the best trader from the average trader is knowledge and experience.
Luckily, there are thousands of materials about forex trading. If you implement trading tools accurately, can make a successful forex trader. In addition to that have sufficient knowledge plus fundamental and technical analysis.
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