Forex Analysis Tools

This technical guide introduces different types of Forex analysis tools. These tools will help your trading and help you make more informed decisions. To improve your performance as a trader, you should know how use trading tools available to you.

Today’s market participants have a huge selection of trading tools at their disposal. The selection can be overwhelming at times. So I will group the tools into categories based on an analysis approach.

The four groups of trading tools to analyze and assess the market are:

  1. Trend Analysis Tools
  2. Market Analysis Tools
  3. Technical Analysis Tools
  4. Sentiment Analysis Tools

Forex Trend Analysis Tools

Before deciding to buy or to sell a pair you need to assess the current market direction. There are several tools that can help assess the predominant trend. The simplest trend-following tool is a moving average tool. Moving average will give you the historical trend of a pair. This should be your first step in doing technical analysis.

Moving average example

The majority of the trading platforms come with built-in technical indicators.  Moving average is in their default box of indicators.

One of my must-have favorite tools at the moment is PitView. The tool shows what the liquidity providers (the banks) are doing to manipulate the currency markets. With this information, you are able to predict the future trends of the markets. There is a free trial of the tool available for 15 days, that you can get by signing up here. Here is a video of it being used.

Forex Market Analysis Tools

Forex market analysis tools are standalone tools. They assist traders with various calculations and market analysis. These are external technical tools that give you statistical information on the market.

Forex Correlation

Forex Correlation

The currency correlation tool measures the correlation between two or more currency pairs. It will show if the movement of a currency pair is moving in a similar way to other pairs. Trading correlated pairs can lead to lower profits.

Carry Trade Calculator

Carry Trade Calculator

A Carry trade calculator predicts the interest that you will either be paid, or you must pay when holding a trade overnight. These payments will affect your account balance and your trade profitability.

Forex Volatility Calculator

The Forex Volatility Calculator shows you how much a currency is going to move, on average, and over any given period. It is calculated by taking the average of the difference between the highest and the lowest price on any time frame.

Forex Volatility Calculator

This tool can be very useful in determining which currency is most active and also can be used for target and stop-loss objectives.

Pivot Point Calculator

Pivot Point Calculator

A Pivot Point Calculator is used to calculate pivot points in any trading market. A pivot point is where an up trending market pivots downwards, or a downward trending market turns into a positive trend.

Position Sizing Calculator

Position Sizing Calculator

Use a position size calculator to help you quickly calculate the size of your position. Having a trading plan and risk management strategy is central to maintaining a healthy portfolio.

Pip Value Calculator

Pip Value Calculator

Pip value varies from one currency to another. To find how much each pip fluctuation represents in a dollar amount, a Pip value calculator is quite handy.

Forex Technical Analysis Tools

There are a variety of technical indicators that a trader can use to gain more insights about the market price. Most trading platforms include different technical indicators that can be placed on a price chart. They can be broken up into three groups:

  1. Lagging indicators (Example: Moving Averages – see above).
  2. Leading indicators (Example: Stochastic and MACD – see below).
  3. Confirming indicators (Example: On Balance Volume).

The RSI indicator (Relative Strength Index) is one of the most popular technical tools used to detect overbought and oversold pairs. It is a good indicator of the overall momentum in the market. Example below.

RSI Indicator

The MACD (moving average convergence divergence) fits into technical analysis. It is one of the most used momentum indicators. Traders use this indicator to also gauge the overall strength of the market. The mechanics behind this technical tool are quite simple. If the histogram shows a reading above zero, we have bullish momentum and below zero we have bearish momentum. Example below.

MACD (moving average convergence divergence)

The Bollinger Bands indicator is a technical indicator that overlays on price. This tool can be helpful in determining where to take profit, but also where to hide your protective stop loss order.  Example below.

Bollinger Bands

Forex Sentiment Analysis Tools

The Sentiment analysis tool essentially measures positions of other traders in the market. Since 95% of traders lose money this can be a valuable tool to show overcrowded trends. When you know that the majority of traders are in agreement about the current trend that’s basically when you want to look go in the opposite direction.

Client Open Positions

Most retail FX brokers will provide you with a short summary of open positions held by their clients.  This shows where the retail money is heading and what the most crowded trade is.

Another great source of sentiment analysis can be obtained from the COT report. The COT report contains information about where the big players and hedge funds are placing their money.

Summary

Each of these technical tools gives you different information about the market price. A trade should use a blend of them to ensure that a trading decision is as qualified as possible.

The only way you’ll know what trading tools you need over time, is to know what type of trader you are. This is because swing traders will need different tools than a scalper or a day trader.

Trading Forex and CFDs is not suitable for all investors and comes with a high risk of losing money rapidly due to leverage. 75-90% of retail investors lose money trading these products. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.