How to Apply the Right Trading Tools in the Forex Market

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A trader will always have to make one crucial decisions when trading, and it is a decision that will determine the outcome of everything else; they will need to choose whether to enter a trade or not. It’s a simple concept – if the trade looks good on your charts, go ahead. If it doesn’t, stay away. But some traders operate on ‘gut instinct’, telling themselves they have some kind of sixth sense when it comes to trading and picking the right ones. Not only that, but some traders are greedy, and will therefore enter a trade they shouldn’t on the (very) off chance that they will win out.

Trading is, of course, about more than greed (this shouldn’t ever even enter into it) or gut feeling. It is about learning how to do it right and ensuring that you have done your homework. Even if this initial stage takes many weeks or months and you don’t actually enter a trade for a long time, it is worth the wait if you’re going to do it right.

On top of everything, traders need to know when to use the correct trading tools in their trading. This will come with experience and knowledge, but there are other things to look out for too. And when exactly do you need to use these tools? There are some examples below. Remember that when it comes to trading foreign exchange, stocks and commodities, the same logic generally applies.

Trending Forex Market

A market trend is something that all traders are going to be happy with. No matter whether it is up or down, the point is that these trends are likely to continue in that direction, giving traders a good idea whether or not to enter the trade.

In order to ensure that a trend will continue for a while (or ensure as far as possible), you can use tools to help you.

Sideways Forex Market

Sideways movements mean that trend following systems can have trouble. Sideways trading is also known as range trading, and many traders think it seems a safe bet – literally. However, the problem is that it takes time to identify the range needed, and by that time they have missed their entry, or entered and found they are losing.

A trading tool in this situation is always going to be a popular idea. If they can speed up the decision making process, more successful trades can be made, and more unsuccessful trades can be avoided.

The Tools To Use

The ADX

Possibly the most popular indicators made to point towards the presence of a trade is the ADX, which stands for the Average Directional Movement Index. When there is a reading of either 20 or more or 25 or more, then it signals that there is a trend happening. Knowing this means you will know whether to enter the trade or not. If there is no trend, you might prefer to wait it out until there is. If there is a trend and you can be more sure of predicting what is going to happen, your trading could go well.

As well as this, an ADX reading of below 20 or 25 means that there is a sideways market, and the effect of any trend following system becomes useless.

Probabilities

When you trade forex you must remember that it is all about probabilities and there are no guarantees. This is something that can easily be forgotten when trading, especially when things are going well, but it should be something that is always at the forefront of any serious trader’s mind if they want to escape disaster.

Conclusion

Probabilities are all important when trading the forex markets, and any serious trader needs to ensure – as far as possible – that the probabilities are in their favour. Using tools to do this is going to help immeasurably. But in order to use the correct tools in the right way, you need to know your markets well.