Forex Analysis Tools

This technical guide outlines the different types of Forex analysis tools that will equip you with everything you need to start trading and make more informed decisions. In order to better understand what is happening in the market and improve your overall performance as a trader, you should confidently use every trading tool 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 it’s important to group the tools into categories so as to better understand what suits your needs.

The four groups of trading tools to rapidly 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 technical tools that you can use to assess the predominant trend and the simplest trend-following tool is a moving average.  Moving average will give you the historical trend of a pair and the first step in technical analysis.

Moving average example

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

Forex Market Analysis Tools

The Forex market analysis tools are standalone tools that can assist you with various calculations and market analysis. In this category, we can include external (in addition to what traditional brokers offer) technical tools that are designed to give you quick statistical information on the market.

Forex Correlation

Forex Correlation

The currency correlation tool measures the correlation between two or more currency pairs. In other words, it will show whether or not the movement of one currency pair is moving in a similar way, or in a counter direction if they are moving in opposite directions.

Carry Trade Calculator

Carry Trade Calculator

A Carry trade calculator is used to predict the interest that you will either be paid, or you must pay when executing a trade.  It is important to understand this because with higher borrowing (leverage) you this will impact your margins.

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

For money management purposes, and if you want something quick to help you calculate the size of your position, you can use a position size calculator.  Establishing a trading plan and risk management are central to maintaining a healthy portfolio.

Pip Value Calculator

Pip Value Calculator

The pip value varies from one currency to another and if you want 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 and which can be categorized 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 an example of one of the most popular technical tools used to detect overbought and oversold signals and an indicator of the overall momentum in the market.  Example below.

RSI Indicator

The MACD (moving average convergence divergence) fits quite well into the overall technical analysis because it’s 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 one of those technical indicators that overlay 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, which 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

When making your trading decisions, you shouldn’t need to decide whether or not to use a trend analysis tool or a sentiment analysis tools. Each of these technical tools gives you a different type of information about the market price so you should use a blend of them to ensure that your 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 because swing traders might require different tools than a scalp trader or a day trader.