Forex Trading Tools for Analysis

In order to trade forex successfully, a trader will need to become very familiar with many of the different tools for analyzing the market. Many of these tools are charts and indicators that are used by the trader to predict the market and make more educated decision while trading forex. The better you know how to use these tools, the better off you will be when it comes to trading.

Forex Trading ToolsEach of the different tools that traders use are designed for a unique purpose in the overall analysis of the forex market. The main goal is to observe how each indicator demonstrates the direction, entry, exit, weakness or strength of trending and nontrending markets. All of the indicators perform differently but are used by traders as a whole in order to predict the market.

Below we have gone through a brief overview of many of the different tools used for analyzing the forex market. When trading forex be sure that you are able to develop a good understanding of how each one works and what the purpose is for each individual indicator. Once you are able to do that, you will be on your way to a successful career in forex trading.

Bollinger Bands

The Bollinger bands are curves drawn in and around the price structure. They provide relative definitions of high and low. Traders use these bands in order to them make a rational investment decision by comparing price action with the actions of indicators. The can be applied to almost anything in the market including currency pairs, indices, futures and mutual funds.

When starting out with the Bollinger bands, the main thing people want to know is how they are calculated. The base for any of these bands is a moving average and the band's width is determined by volatility. Since they were created by John Bollinger, Bollinger Bands have sharpened the sensitivity of fixed indicators, allowing them to more precisely show the market's volatility.

Elliot Waves

The Elliot Waves were discerned by R.N. Elliot as he discovered that there were two basic types of wave patterns: (1) Impulse Waves - waves that move in the dame direction as the main trend of the market, and (2) Corrective Waves - waves that move counter to the main direction of the market. Impulse waves consist of five smaller waves and corrective waves consist of three smaller waves.

One of the toughest things that traders have while using Elliot wave analysis is correctly labeling and counting the waves. If a trader is able to correctly count the waves it can lead to incredible accuracy while forecasting the market. On the other hand, wrong wave counting will have the opposite result and can lead to negative results for the analyst.

Moving Averages

The moving averages chart is another popular trading tool that is used by most professional traders today. This tool is considered to be a lagging indicator of price swings, which makes short and long-term trends easier to identify. These moving averages are calculated on user specifications and can be designed for different styles, as well as different time frames.

Not only can the averages be calculated based upon different time frames, but also on the opening, high, low or closing price. Traders also use the midpoint of the time frame, which is actually an average within itself. There are three different kinds of moving averages which are listed below:

  1. Simple Moving Average
  2. Weighted Moving Average
  3. Exponentially Smoothed Moving Average

Each of these moving averages were designed for a specific purpose and learning how to use each one correctly can greatly improves a trader's success.

Fibonacci Numerical Sequences

Fibonacci was a mathematician who lived in the 1200's. He developed a numerical sequence of numbers that are written left to right and after the first two numbers, the values increase successively. Beyond that, each number, in turn, is figured by the sum of the previous two numbers. A simple example of this would be 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on.

There are many people in the forex market today that use Fibonacci sequences when doing their own technical analysis, in an attempt to determine support and resistance. As you develop your own process for technical analysis, you will find out that there are many different ways and charts that you can study when using Fibonacci sequences.

Directional Movement Index

This trading tool was created by Welles Wilder and consists of two indicators: the average directional index and the directional index. The directional index is also both positive and negative. The average directional index is used to measure the strength of a prevailing trend, rising when direction is strong and falling when the direction is weakening.

The Directional Movement Index (DMI) is used by many forex traders today and both indicators involved work together to make up a complete trading tool used for technical analysis. If you are someone that really wants to become a compete trader, you will want to learn how to use this indicator and add it into your own analysis.

More Trading Tools

Below we have listed several more articles on specific tools and indicators that are used most often while trading forex online. We suggest taking a look through each one and getting a better understanding before you start a real forex trading account.

Learning more about the different trading tools and chart types will help ensure your success as a forex trader. The more tools and indicators that you are able to utilize while trading, the better your analysis of the market will be. One of the best things that any forex trader can do is to continually learn more and develop their trading skills and techniques.