Top Trading Tools Used by Professional Traders

Create a Strategy that You Are Comfortable Trading

Professional traders may use multiple strategies to tackle the forex markets. Some use purely technical analysis strategies that have been backtested, while others use discretionary strategies that are technical as well as fundamental in nature. You need to define a strategy that you feel comfortable trading and test it using a demo account before you risk your real capital.

Most professional traders believe that forex markets are driven by interest rate differentials over the long term. You can see from the chart of the German 10-year yield subtracted from the US 10-year yield and the EUR/USD that the interest rate differential and the currency pair are negatively correlated. As US yields rise relative to German yields, the dollar gets stronger. As US yields fall relative to German yields, the dollar gets weaker.

Most professional traders use several strategies that they consistently try to improve. Your strategy could be to use a technical indicator or interest rate differentials. Most trading strategies have multiple parts including the entry criteria which helps you determine when to get into a trade and your risk management, which includes your take profit level and your stop loss price.  Whether you are using a trailing stop loss or a fixed percentage, you want to determine all these factors before you enter a trade.

Using MT4

MetaTrader 4, one of the most popular trading platforms, has a plethora of online trading tools that you can use to generate a strategy. In addition, if you develop a strategy that works without a discretionary overlay, you can automate the execution of the strategy using the MT4 Expert Advisor. The Expert Advisor (EA) is an excellent tool that allows you to program your trading criteria into the EA software. Your execution and risk management will be automated. This could give you the extra time that you can use to perform research on your trading strategies.

Technical Analysis Tools

There are several technical analysis tools available. MT4 not only has a plethora of technical indicators, but it also provides custom technical tools that can be designed.  The best way to determine what technical tools to use is to match it to historical trading environments and your trading personality.

There are several types of trading environments. Most markets experience all of them at one time or another. There are trending markets, sideways markets, volatile markets, and complacent markets. It is hard to find an indicator that works well in all environments. With that in mind, your goal should be to trade the markets you feel the most comfortable with. 

For example, if you like to ride a long trend, with few trades, then a trend following strategy will likely make you feel the most comfortable. If you like to trade a lot when a market is moving sideways and consolidating, then you should look for periods when a currency pair is range bound.

Try to avoid a trading a style that you are uncomfortable with. This is a recipe for failure. Trend followers that are looking for higher prices are generally not comfortable catching the diving knife as prices move lower.

Remove Your Emotions

An issue that professional traders have mastered is to remove their emotions from their trading decisions. Novice traders generally fall prey to market head fakes. Markets gyrations over short periods tend to push traders out of their positions, only to move in the direction of a trend eventually. One way to avoid allowing your emotions to take control is to use an automated system. By creating a system or even purchasing one, you can avoid taking profits too early or stopping out when the market moves against you.

One of the best ways to test to see if an automated system works is to backtest it using historical data. While past results do not predict future returns, a system that works over a long period will likely continue to succeed. When you can, test a system to see if it worked over many different periods. For example, if you test over 12 years, and see good results, the next step would be to break the period down into three four-year periods and test each of those periods separately. When you find a system that works over many periods it has likely experienced sideways markets, trending markets, and volatile markets.

Use Volatility as a Gauge

Volatile situations are very difficult to navigate. When prices whipsaw widely, it’s hard to make good trading decisions. One way to determine if volatility is likely to pick up is to evaluate both historical and implied volatility.

Implied volatility is the market's estimate of how volatile a currency pair will be in the future. It is used by option traders to determine the option premium. High levels of implied volatility reflect high option premiums. When implied volatility is high, traders believe that the markets will be volatile in the future. Historical volatility tells you how volatile markets have moved in the past. When historical volatility declines to lower levels, it could be telling you that the market is complacent.

Summary

If you want to be a professional trader, you need to find an edge. You need to develop a sound strategy that you believe in and use other variables to determine the market environment. Online trading tools and automated products like the MT4 Expert Advisor is a must if you plan to use a backtested systematic strategy. One of the key benefits of automated strategies is that it removes emotion from trading. If you plan on being a discretionary trader, make sure you use a combination of technical, fundamental, and sentiment analysis to make your trading decisions.

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