What are the Main Trading Tools that You can Use to Make Decisions?
Friday, February 21, 2020, 6:00 AM | Leave Comment
Before you decide to place a trade, you should go through a process that allows you to make the best decision possible.
This includes using all the methods in your trading tool belt, which could include using trendlines on a chart, an economic calendar, a demonstration account, technical analysis and real-time news.
These trading tools will provide you with a strategy as well as risk management techniques that will provide you with the best risk adjusted returns.
Before you pull the trigger on a trade, make sure you analyze the asset you are trading using the different tools that are available.
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Start with the big Picture
A picture says a thousand words and in the case of the EUR/USD, it shows you that the most recent price action of the exchange rate is downward sloping. With the trend in the EUR/USD moving lower, you need to determine whether you want to ride the trend down or wait for a period where the exchange rate begins to rebound.
Without the big picture you would not be able to view a historical reference from where the exchange rate recently came from. The picture allows you to determine support and resistance levels. Support is a level where the exchange rate finds buyers.
Resistance is a level where sellers become dominant. Generally, when an exchange rate or prices break through support or resistance levels the trend accelerates in the direction of the breakout.
You can see from the chart of the EUR/USD that the exchange rate is trading near support levels which is equal to the September and October lows. A break below this level would lead to further declines. Resistance could be the 10-day moving average, the 50-day moving average at 1.11 or the December highs at 1.1240.
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Technical Analysis
In addition to using support and resistance levels you can use technical analysis techniques to help gauge the future direction of an exchange rate. For example, you can use the relative strength index (RSI) to determine if an exchange rate is overbought or oversold. The fast stochastic can also help you determine how stretched prices can be.
In the chart above the green arrows show you that both the RSI and the fast stochastic are oversold. Reading on the RSI below 30 are considered oversold, reading on the fast stochastic below 20 are considered oversold.
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Using an Economic Calendar and News
New information can be a significant driver of the capital markets. Data that will drive the exchange rate of the EUR/USD could include information that will help investors determine the strength of the US or European economies. This could include data such as the US employment report or European GDP.
The best way to track this information is through an economic calendar. The calendar will show you when data is expected to be released. It will also show you what is expected, and what data was released the last time this same data was reported.
The capital markets are efficient. All the news that is currently available is incorporated into the exchange rate of a currency pair. You can find new information in an economic calendar as well as through the news. You want to try to follow the news in real-time if possible.
Most brokers will offer real-time news through their web-portal.
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Using A Demo Account
Once you have evaluated a security using multiple tools you can test a strategy using a demo account. This is an account that works in real-time but allows you to place a trade using demo money instead of real capital. By using a combination of charts, technical analysis, an economic calendar, real-time news and a demonstration account, you are providing yourself the best opportunity to generate successful trades.
