Forex trading is popular with part-time and full-time professionals from around the world. Most traders are attracted by the excellent profit potential, low start-up and operational costs, and the fact that they can trade anywhere. In this article, we will look at the five essential tools you need to become an excellent Forex trader.
An economic calendar is an essential tool used by traders to know when key events in the market happen, making it an essential tool in fundamental analysis. The calendar is provided for free by most Forex brokerage companies. It is also provided by free platforms like MetaTrader 5, Investing.com, and DailyFx. The screenshot below shows what an economic calendar looks like:
An economic calendar has several parts. At the top, we have the dates of the events, with yesterday, today, tomorrow, this week, and next week provided by default. You can also select the exact dates you want to view. You can also consult it for the exact time when the event will be released, the countries, the importance of the events, the actual forecast, and previous data. Some of the most important events in the economic calendar are:
- Inflation – These numbers include the Consumer Price Index (CPI) and the Producer Price Index (PPI).
- Employment – The data shows the number of people who were employed and laid-off in a country.
- Interest rates – This is probably an important figure in the calendar because it impacts the cost of lending and the value of the currency.
- PMIs – The manufacturing and services PMIs are essential gauges of the two sectors in the economy.
Currency correlation tool
Correlation is an important concept for traders who use the pairs trading approach. This is a trading approach that seeks to minimize risk by opening two currency pairs trades that trade alike. For example, if the EUR/NZD and GBP/NZD move in the same direction, the idea is to buy one pair and short the other one.
If the trades work out, you will profit in one and lose in the second trade. As a result, your profit will be the spread or the difference between profit and loss.
In pairs trading, it is easy to look at the charts and identify currency pairs that trade alike. However, a simpler approach is to use a currency correlation tool. While there are many correlation providers, we prefer using the one provided by Oanda.
Currency correlation tool
In correlations, a coefficient of 1 is usually a sign that two currency pairs have a close relationship. A reading of -1, on the other hand, usually shows that the two currency pairs have a complete inverse relationship. For example, in the table above, we see that the EUR/USD and AUD/HKD have had a correlation of 0.96 in the past six months. Now, look at their performance in the chart below.
AUD/HKD vs. EUR/USD
News plays an important role in trading currencies. That is because currencies usually move because of the latest news. For example, in June 2016, the British pound crashed after the Leave side won the Brexit vote. Similarly, in 2015, the Swiss franc spiked after the Swiss National Bank voted to remove the peg on the currency. Recently, the US dollar rose sharply when the World Health Organisation (WHO) declared Covid-19 a global pandemic.
Therefore, having the right news sources can help you be the first to react to the latest events. Some of the best news sources are relatively expensive. For example, the Bloomberg Terminal costs about $2,000 per month while the Reuters Eikon goes for about $600 per month. The two are usually paid as an annual subscription, which is unaffordable to most people.
Fortunately, there are several free news sources that you can use. For example, for television media, you can use Bloomberg and CNBC. For digital media, you can use platforms like Investing.com, Bloomberg, Wall Street Journal, and Reuters.
Charting is the process of using technical tools to predict the future direction of currencies. Traders use different approaches to analyze their trading charts. There are those who believe in using technical indicators like the Relative Strength Index (RSI), moving averages, Relative Vigour Index (RVI), and stochastics. There are others who prefer using tools like Fibonacci retracement and Andrews pitchfork. Others use complex trading algorithms in their charts.
Fortunately, most Forex brokers provide their traders with free charting tools. Some of the most popular tools are the MetaTrader 4, MetaTrader 5, and cTrader, among others. Still, the most popular charting tool in Forex, stocks, and other assets is the TradingView.
The platform provides most tools, including hundreds of indicators, trendline drawing tools, shapes, and patterns. It also has access to most financial assets in the world. Most importantly, it has social tools, allowing you to see the views of other traders.
Tools in TradingView
Finally, having access to various types of calculators can help you simplify your Forex trading experience. On this, there are several types of trading calculators you can use. For example, the Forex volatility calculator provided by Investing.com calculates the average number of pips in a certain period. For example, the chart below shows that the number of pips on EUR/USD in the past four weeks.
The average number of EUR/USD pips
There are other types of calculators you can use in Forex:
- Pivot point calculator – This one helps you identify the pivot point and the potential support and resistance levels.
- Margin calculator – This calculator helps you compute the amount of money you need to hold open positions.
- Pip calculator – This tool helps you calculate the number of pips in a standard lot, mini lot, and micro lot.
Forex trading can be a difficult thing, especially for beginners. That is because of the amount of information you need to digest and the key moving parts involved. The tools we have mentioned in this report will help simplify your day trading approach and make better trades.