The forex market is unique in many ways, so knowing what the best forex trading tools are for this particular market could significantly improve your bottom line. Keep reading to find out which tools work best for trading currencies.
- Trading platforms
- Charting software
- Economic calendar
- Financial news wire
- Trade journal
- Copy trading service
- Currency correlation matrix
- Time zone converter
- Forex volatility calculator
What is Forex and How Does it Work?
Foreign exchange or forex involves the buying and selling of the world’s national currencies like the U.S. dollar and the UK’s pound sterling. The decentralized forex market is the largest capital market in the world with a daily turnover in excess of $5 trillion a day.
Trading in the forex market begins in Wellington, New Zealand at 5 p.m. EST on Sunday and ends in New York on Friday at 5 p.m. ET, so the market trades for 24 hours each day throughout the trading week.
How it Works
Trading in the forex market involves the simultaneous buying of one currency and the selling of another. All currency trades involve a currency pair and when taking a forex position, you simultaneously go long 1 currency and short another.
The base currency is the 1st currency in a currency pair, while the 2nd currency is the quote or counter currency. The exchange rate of the currency pair is the amount of quote currency needed to buy one unit of the base currency.
The most active currency pairs have the U.S. dollar as a component and are known as the majors. They are:
- EUR/USD: The EU euro versus the U.S. dollar.
- USD/JPY: The U.S. dollar versus the Japanese yen.
- GBP/USD: The UK pound sterling versus the U.S. dollar.
- USD/CHF: The U.S. dollar versus the Swiss franc.
- AUD/USD: The Australian dollar versus the U.S. dollar.
- USD/CAD: The U.S. dollar versus the Canadian dollar.
- NZD/USD: The New Zealand dollar versus the U.S. dollar
Currency pairs that do not include the U.S. dollar are known as crosses, and they often have considerably less liquid markets than the majors. Other less liquid pairs that do include the U.S. dollar consist of the minor and exotic currency pairs.
Brokers and market makers operating in the forex market make their money largely from the dealing spread instead of charging a commission. The dealing spread consists of the difference between the bid and offer price for a particular currency pair.
The bid is the exchange rate where the market maker will buy a currency pair, while the offer is the exchange rate where the market maker will sell it. Most active currency pairs are quoted to the 4th decimal place (0.0001 or 1 pip) and have tight dealing spreads between 1 to 3 pips, while less liquid pairs tend to have wider dealing spreads.
The width of the dealing spread is an important cost to a trader and can add up considerably for those who trade actively. Spreads can also vary depending on market conditions. You should look at a broker’s typical dealing spreads when choosing the best forex broker for your particular needs.
The Benefits of Forex Trading
The forex market has various benefits compared to other financial markets like the stock, bond and commodities markets. Here are several key benefits of forex trading:
- High liquidity: The forex market is the largest and most liquid financial market in the world. Due to the high number of forex market participants, it operates efficiently and is less subject to manipulation by large players.
- Low cost: Most online forex brokers do not charge commissions or fees like you may need to pay when trading equities. You instead just pay away the dealing spread.
- Low capital requirements: You can open a forex trading account and start operating with very little money.
- Leverage: Since forex trading involves an exchange of assets rather than a purchase, the leverage available to traders can be quite high. U.S.-based traders can leverage the money in their margin account up to 50:1, EU based traders can use 30:1 leverage, and those located outside of those jurisdictions can employ leverage of up to 1,000:1, depending on the broker selected.
- Volatility: Currency pairs tend to display moderate volatility and can react sharply to certain events. This can be taken advantage of by nimble traders. Volatile markets can offer great opportunities for short term and momentum traders.
- No restrictions on shorting: In a forex transaction, you’re always going short one currency and long the other. If you want to short a currency, you do not have to worry about an uptick rule like in the U.S. stock market.
When starting off as a forex trader, you will want to invest in the best forex trading software you can afford and get all the forex trading tools necessary to operate your trading business with.
Here’s our list of the 9 best forex tools:
- Trading platforms: Advanced trading platforms like MetaTrader 4 and 5 (MT4/5) by MetaQuotes let traders enter orders and offer many features for analyzing the forex market in real time.
- Charting software: Most advanced forex trading platforms provide real time charting services, although you can also obtain charting software elsewhere.
- Economic calendar: An economic calendar lists the time and date of important economic data that can affect currency pairs when released. The data includes employment and inflation numbers, gross domestic product (GDP) and central bank meeting dates.
- Financial news wire: News can significantly affect the direction of exchange rates. A premium financial news wire gives traders timely access to information that might affect the forex market.
- Trade journal: Keeping a trade journal gives you valuable insight into both your losing and winning trades. Some companies provide software designed just for this purpose.
- Copy trading service: Copy trading involves selecting an experienced trader to duplicate their trades in your account. Some brokers like eToro offer this service.
- Currency correlation matrix: Correlation measures how one currency pair’s exchange rate changes relative to the exchange rate of another currency pair. A set of correlations comprise a currency correlation matrix, which lets you visualize the interconnectedness of currency pair exchange rate movements.
- Time zone converter: Certain trading sessions and times are better than others for trading specific currency pairs with respect to liquidity, volatility and trading volume, so knowing what those times are in your local time zone can be extremely important to forex traders.
- Forex volatility calculator: A volatility calculator takes a currency pair’s historical exchange rate data and determines the historical volatility in real time for various different time frames. The historical volatility of a currency pair gives a trader an idea of the risk involved in trading that particular currency pair.
MetaTrader4 and 5 trading platforms on desktop and mobile devices. Source: MetaTrader.
Forex Software Considerations
Charting software generally features a slew of technical indicators that can provide trading signals. Some forex trading software even lets you program and backtest your strategies to determine how they performed historically.
Other trading platforms tend to have similar features, although the automation feature found on the MT4/5 software may not be available on them. You can program or purchase expert advisor software to automate your trading plan using MT4/5.
In addition, you can buy or subscribe to trading signal generators that are typically offered as a monthly service.
Ease of Use
Once you’ve opened a demo account with an online forex broker, and you’ve familiarized yourself with the trading platform, getting access to and using the various forex trading tools mentioned above shouldn’t be difficult.
If you decide on a broker that supports the MT4/5 trading platforms, then you should get access to the MT4 and 5 mobile trading app. The MT4/5 mobile trading app is one of the best forex trading mobile apps and offers many of the features available on the popular desktop version.
In normal markets, you can expect a high degree of accuracy from your forex tools as long as the exchange rate feeds they use are of a high quality. When the market heats up with increased trading volume and exchange rate swings, the accuracy of your software may be adversely affected.
While many of the best forex trading tools can be accessed via popular trading platforms like MT4/5 or proprietary software offered by brokers to their clients, 3rd party providers will generally charge either a purchase price or a monthly fee depending on the services provided.
In addition to signals and indicators, many 3rd party services provide educational and research resources. The cost for 3rd party services can vary significantly. The cost for a service typically increases depending on the extra features provided.
The Market Scalper Algo (MS Algo) is a tool that currently works only within TradingView to overlay your financial charts with signals to buy and sell. It also provides independent exit signals for each.
The tools can be used on equities, futures, forex and cryptocurrency. It uses proprietary technology and strategies to provide the most accurate signatures. You can setup automated alerts for your phone, email and Webhooks.
It’s easy to setup and affordable. Plans start at $49 per month.
Best Online Forex Brokers
The best online forex broker for you depends on your needs as a trader. In general, you want to select a broker you can trust with your money that meets your trading requirements and will accept you as a client.
Take a look at our picks for the best online forex brokers:
Is Forex Trading for You?
If you have the patience to learn how the forex market works and the incentive to develop an easy to follow and successful trading plan, then you might be able to make a career trading in the forex market.
If your objective is to participate in the market without direct involvement, then you could open a social trading account and just copy a successful trader’s transactions.
Frequently Asked Questions
Can you get rich off forex trading?
Yes, although profitable trading generally involves developing and implementing a trading plan with a successful strategy. Getting rich depends in large part on how disciplined you are in your trading, how much risk capital you have to trade with and the successful implementation of a proven trading plan.
How difficult is forex?
Trading forex online may not seem difficult, but trading successfully requires a good trading plan and strategy, as well as time, discipline and perseverance.
Can I trade forex with $100?
Yes, you can trade micro lots in an online forex trading account with $100 or even less. Starting off with a small sum of money makes perfect sense to practice and determine if you have what it takes to be successful trading forex.
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