Forex trading tools are mathematical indicators that are used to analyze figures such as volume, high, low, open, and close price. Technical tools are represented graphically as chart patterns. There are a lot of indicators out there, and anybody who has got good coding skills can write these tools on their own. To become successful in forex trading, a trader must learn technical analysis as these technical tools are a massive part of technical analysis.
Technical Tools: Real Work
The reality is that the technical tools will not directly lead you to profit, and trusting them blindly is not the correct way. However, these tools will do plenty of work for you.Fun Fact: An experienced and skilled trader doesn't need indicators & can get profit without using tools.
Technical tools can tell you some wonderful things like
- It saves time for market analysis.
- It shows something that is not noticeable.
- Help to discover a trade idea.
Types of Trading Tools: Leading & Lagging
Forex trading tools are divided into two parts: leading tools and lagging tools.
Leading Trading Tools:
A leading tool is a prediction signal that predicts future price fluctuations. It is a technical indicator that uses past price data to estimate future market price movements. A leading indicator allows traders to forecast future price movements and thus, investors can enter the potential trade at the move start. The downside to these is that traders predict a trade before it really happens and the market can move in the opposite direction. As a result, it is not unusual to watch a false pause, or, a reversal sign of a trend that only lands as a loss.
Top Leading Trading Tools:
- Fibonacci Retracement
- Support & Resistance Level
- Stochastic Oscillator
Fibonacci Retracement: Fibonacci trading is recommended in 0an uptrend market & you must try to identify strong market trends. In a trending market, the price shows a certain pullback level before it is reversed & Fibonacci tool can help to determine that reverse fall before happening. You can set the Fibonacci indicator level to determine the signal for a potential reversal and open the position in the same direction as the main trend.
Advantages of Fibonacci Retracement
- Easy to set on your graph & simple to identify;
- Applies to most assets;
- One can confirm the market movement by understanding support and resistance levels of retracement;
Disadvantages of Fibonacci Retracement
- All the levels are subjective;
- Requires a certain level of knowledge when the trader wants to differentiate between an extended reversal or temporary retracement
Support & Resistance Level: This indicator is a two-level tool, each on the price chart, that seems to limit the range of market movements. 'Support' is where prices stop falling and reverse backs, while the resistance level is the place where the price usually stops up and goes down again. Both of them are a result of supply & demand - if there are more buyers than sellers, the price can rise, and if there are more sellers than buyers, prices tend to fall.
Advantages of Support & Resistance Level
- High risk to reward ratio for trades
- The candlestick pattern enhances trade entry
Disadvantages of Support & Resistance Level
- The indicator is not a sure shot bet to profit and needs other tools to predict better.
Stochastic Oscillator: Stochastic indicator is a great tool to identify oversold and overbought situations for a certain period of time in the market. The tool is used by investors when prices are trading within a stable range because the price itself is 'oscillating', which leads to a more reliable signal of the stochastic indicator.
Advantages of Stochastic Oscillator
- The indicator is straightforward to analyze & understand
- It gives frequent signals, making it more profitable than others.
- Stochastic facilitates clear signals on entry & exit points.
Disadvantages of Stochastic Oscillator
- The indicator can give wrong signals if used incorrectly.
- Prices can also remain oversold or overbought for longer time, if trading against the trend.
Lagging Trading Tools
A lagging tool focuses on past trends and indicates momentum. They predict the prices solely on the past behavior of the asset and do not use any signals.
In simple words, a lagging indicator is a tool used by traders to analyze the market using the average price of previous price actions. Lagging indicator, as the name suggests, lag market.
Top Lagging Trading Tools:
- Relative Strength Index
- Moving Average Convergence Divergence
- Simple Moving Average
- Bollinger Bands
- Moving Average (MA) The simple moving average (SMA) or Moving Average (MA) tool is used to spot the direction of a present price trend without any short-term price spikes. The moving average is the best and long term trend tool. MA makes it easy for traders to find opportunities in different directions of the whole trend.
A trader can use a Moving Average (MA) to identify the trend and the perfect time to sell or buy. The length of the MA is so crucial because the data that is used in the MA depends on the length; for example, a 50 day moving average needs 50 days of data.
Advantages of Moving Average:
- Finds trend alteration
- Find the direction of a trend
- Tells possible support and resistance levels.
- Fall off behind the present price
- Moving Average Convergence Divergence (MACD) MACD calculates the driving force behind the market. It also shows when a market needs a rest or correction after getting tired of moving in a single direction. MACD tool notices the changes in fluctuations by comparing two MAs. It can help traders to spot possibilities to buy and sell assets around the resistance and support levels.
If two moving averages are coming together, it is known as 'Convergence', and if they're moving away from each other, then it is known as 'divergence'. Convergence shows that the momentum is decreasing, whereas divergence indicates that the momentum is increasing.
Advantages of Moving Average Convergence Divergence (MACD):
- MACD can be used for both ranging and trending markets.
- The principle of MACD is quite similar to other oscillators.
- One can easily understand other oscillators easily who understand MACD.
- The tools fall off behind the price chart.
- The decisive move of the market does not follow some signals.
- Bollinger Bands Bollinger Bands include three lines, and every line is an MA. Bollinger band tool offers a range within which the value of an asset generally trades. The width of the band rises and reduces to reflect current volatility. The considered volatility of the financial assets will be lower when the bands are closer to each other; the broader the bands, higher the sensed volatility.
Bollinger bands are beneficial for remembering when an asset is trading externally of its normal levels. Bollinger bands are also utilized mainly as a way to forecast long-term price fluctuations. When a price frequently proceeds below the lower band, it can be oversold, and when it proceeds outside the higher range, it can be overbought.
Advantages of Bollinger Bands:
- In a sideways market, the tool is exceptional.
- During a powerful trend, the price can waste a long time at a single Bollinger line without going to the different side.
You can use your skill, knowledge and risk handling capacity to identify out of these trading tools which will best suit your strategy. Once a trader knows how to use the Moving tools, he/she will be on their way to execute their trading strategy just like an expert.