Trading tools are crucial elements that can help you find signals to buy or sell currency pairs. Through these trading tools, you can easily predict in which direction the market will move and where it will reverse. This information can prove really helpful in making trading decisions. But to have a consistent and effective forex strategy, it’s important to understand how you can make different indicators work together for a comprehensive trading strategy.
You will find one thing common in all the professional traders you will come across: their ability to manage risks. They do this using different tools like trend-following, trend-confirming, overbought and oversold, profit-taking tools and trading calculators. Let’s understand how you can develop a well-rounded trading strategy by combining these tools! Read More
Tools You Need To Create A Successful Forex Trading Strategy
Trend-Following Tools
If you have ever watched any wall street movies, you must have noticed how they glorify traders predicting the market and making tons of profits, but things don’t work like that in reality. To trade safely, you should trade based on the current trend. That’s the only secret to success. The foundation for a profitable trading strategy is often built on spotting a market trend and determining its strength.
You can also use trend-following tools to help you with analysis. These are known as trend-following because they come after the price movements have already happened, which means there is no prediction involved. Let’s take an example of the most commonly used trend-following tool: moving average. It works by comparing the current price to the average of past closing prices over a certain period of time. When you look closely at the direction and duration of the moving-average line, you can figure out if the market is moving in a range, going up, or going down. The steepness of the line can also show you how strong the trend is. When the line is steeper, it indicates a stronger trend.
You can also draw trendlines on the price graph to identify the trend. Simply connect the high and low points of the price movements within a specific period, and you will see the direction of the trend. The slope and direction of the trendline is a useful indicator to find out the direction of the trend. You can also gauge the strength of the trend and use trendlines as support and resistance levels. This is important to give you an idea about when prices might break out or reverse.
Trend-Confirming Tools
Trend trading tools only help you understand how the market is acting, and that’s only half of the story. Using just trend-following tools and making your decisions based on that can lead you to wrong decisions. You should also confirm how strong the trend is, in which direction the market is moving, and what’s the momentum. This helps you make sound decisions. For instance, you can use MACD or Moving Average Convergence Divergence. While using MACD as an indicator, you will see two lines on the charts: an exponential moving average and a simple moving average. Understanding how these lines interact can help you confirm the momentum and strength of the trend. The fact that the momentum changes before any price movement can be considered as an early indicator of a trend change. Therefore, momentum can be used to confirm the trend. Usually, when the momentum is high and the trend is strong, it is considered a good opportunity for entering a trade as the risk is lower at this point, but in the opposite scenario, traders can exit from their positions.
Overbought and Oversold Tools
Traders frequently use overbought and Oversold indicators to find the appropriate entry and exit levels. Overbought and oversold are the extreme levels, and the trend is believed to reverse from there. When the price reaches overbought, it means that it has reached its threshold, and it’s least likely that it will go further up from there. When it’s oversold, it means that the price has fallen too much and is likely to go up from there. In trending markets, prices keep moving back and forth in a predictable pattern.
In a trending market, traders aim to stay in uptrends and downtrends for as long as possible and switch positions at key turning points in the market as it offers the best chances for making a profit. Overbought and oversold indicators are used to predict when the price will be going to reach a breaking point. Traders can use this information to decide when to enter or exit trades. Generally, when a currency pair is overbought, it’s seen as a signal to sell, expecting a trend reversal to the downside. When it’s oversold, it’s seen as a signal to buy, expecting a trend reversal to the upside.
The two most popular forex tools that traders use to identify overbought and oversold levels are the RSI (Relative Strength Index) and the Stochastic Oscillator. However, while using these indicators, it’s important for traders to know that markets can stay overbought or oversold for different periods of time, so reaching those levels doesn’t mean an immediate trade opportunity.
Profit-Taking Tools
Profit-taking tools help you decide when to close your trade and take your profit. They help you find the right balance between risk and reward. Once you have exited the trade and made the profits in another currency, you can easily calculate the profit amount in your own currency using a profit calculator. However, to correctly determine the exit levels, you should be able to recognise when the current trend will change or if it will stay the same, and then for how long you can expect it to continue to the current trend. Understanding this can help you close your trades with maximum profits. You can also use overbought and oversold indicators as profit-taking tools, but relying on only one indicator is not suggested. You should always use at least three to four indicators in tandem for best results.
Generally, the tools which are used for this purpose are Bollinger Bands. These indicators draw three lines on your price graph. The middle line is a simple moving average (SMA), and the other two lines are calculated based on the standard deviation of closing prices. The upper band shows an overbought threshold, and the lower band shows an oversold threshold. These levels are calculated using the standard deviation, which takes into account the variation in prices. This makes them more accurate in reflecting the current market volatility compared to just using an average. In volatile markets, Bollinger Bands are helpful for confirming signals from other indicators and pinpointing exact points to take your profit.
Trading Calculators
Every trader has different goals, trading styles and preferences, but if there’s one thing they have in common, it’s the goal to make profits. No trader enters a trade to lose it, but we can’t deny that losses are inevitable. If there’s anything that’s in our control, then that’s the risk we are willing to take. We can always manage the risk if we think we have an affordable loss. But since the outcome of the trade is unpredictable, how will you figure out all this? Thankfully with trading calculators, you can estimate the number of pips you can gain or lose. Before entering a trade, you can enter the details in a trading calculator and see your potential profit or loss. Different trading calculators are available to help you determine different aspects of the trade; for example, you can use a pip calculator to calculate the number of pips you have earned in your own currency. Similarly, you can use a margin calculator to determine the exact margin you need to make a certain amount of profit. There is the position size calculator to help you know the optimum position size you should trade, the swap calculator to calculate the swap fee (if applicable) and so on. In a nutshell, a trading calculator can help you make a lot of important trading decisions related to your trade, whether you should take it or not. enter a trade or not, what should be the lot size of your trade, what should be your risk-to-reward ratio, and where you should implement your stop loss or take profit levels.
Putting It All Together
With the right forex tools and indicators in your trading toolkit, you can certainly build a strong trading strategy but make sure that you completely understand how to use each indicator before applying it. You should be aware of its strengths and weaknesses and always use other indicators to be extra sure about your trading decisions. Moreover, always keep in mind that indicators only help you estimate the market directions. You should never believe the results to be one hundred percent true and always try to understand the price action.
