Going to a fight without any weapon is a recipe for disaster. In trading, the methodology is similar. The right tools can be the difference between the winners and losers. While there are many instruments promising to boost your profits, only a few work properly.
With the development of technology, online trading has gone through a significant evolution in the past 20 years. Today, even beginners can access quality trading tools, once an exclusive domain of big institutions. Our article will go through the eight major ones, their key features and case studies wherever applicable. All the tools provide adequate functionalities and improvement in trading performance, including reduced latency, fast execution and robust analytical capabilities.
Forex VPS
A Virtual Private Server (VPS) is a remote computer controlled by you using your own PC or cell phone. Previously, the concept of minimal slippage and fast execution was only known to the big market players. However, with the development of VPS explicitly catered for trading, novice traders can enjoy execution speeds similar to big institutions from the comfort of their homes. Here are some of the benefits of a forex VPS:
- As these servers are located close to the data center of brokers, they reduce the latency or the delay in trade execution.
- They are perfect for automated trading. High-frequency trading algorithms such as arbitrage EAs can only perform when there is minimal latency in placing trades.
- Traders who use automated copy trading can set up their slave and master accounts within a server. There is no personal hardware in use, which means you can use your system freely while VPS does all the hard lifting for you.
- VPS companies enforce strong security measures to ensure that your strategies and data are kept safe.
- Traders can also backtest their manual or automated strategies on the go, as these systems only require the internet and a compatible device for accessibility.
What should I look for in a Forex VPS?
A high computing power may be necessary if you implement a scalping or HFT robot that constantly modifies or places positions. The internet connection should also have a high bandwidth.
As mentioned above, make sure you select a VPS located close to your broker. VPS companies now place their virtual machines next to the data centers to help reduce slippage. You can expect anywhere from 1 to 10 ms in execution speeds. A value exceeding these would be meaningless. This is important for traders who are using scalpers to trade.
Some technical knowledge may be necessary to set up these services. You may need an IT expert or a developer to help you out other than the support offered by VPS companies.
Trading Platform
Good trading platforms have a smooth user experience. They are equipped with all the features necessary for both beginners and professionals. Depending on your brokerage, you may be restricted to a single trading software the company supports. Make sure to select a broker that provides the platform of your choice.
A few popular trading software amongst forex traders are MetaTrader 4 and MetaTrader 5. Some general features of these platforms that you may use are:
- Advanced charting: All three support various chart types, timeframes and technical indicators. You can use the built-in charting software to perform your analysis.
- Trading Algorithm: You can develop trading bots in MQL 4 or MQL 5 and backtest them. There is also an option to optimize them. As MT5 is a successor to MT4, it has more feature-rich testing functionalities, including multi-threading backtest and a better coding infrastructure.
- Customization: Traders can adjust each software according to their needs. This includes adjusting the color schemes, changing the layout, and managing the account.
- Market Access. Depending on your broker, you can trade almost all market instruments.
- Security: While both platforms offer top-grade security, MT4 leads the battle with its 129-bit key encrypting the exchange between server and terminals.
Image1. Interface of the popular MT5 trading platform. The software is not connected to the server hence we cannot see the live feed or the trading charts.
Can I run all trading platforms on my VPS?
VPS companies can be strict when installing third-party applications on their servers. As MT4 and MT5 are popular trading platforms, you may not find any restrictions on their installation. Contact your VPS company beforehand if you plan to use any unknown platform.
Trading Algorithms
While various expert advisors have been in development for local traders since the early 2000s, the real exposure is coming now. Investors are more motivated to automate their trading strategies so they don’t have to sit in front of their screens for market analysis. Market participants can hire developers to code their expert advisors, which can be attached to the associated currency pairs. 
Image 2. The trading algorithm above can be tweaked by adjusting its stop loss and take profit and the maximum number of positions.
After coding your strategies into an expert advisor, you may also run a historical backtest. Monte Carlo simulations and detailed analysis can help you find the weak points in your strategy and remove them.
One of the major benefits of these systems is that they eliminate the psychological aspect of trading. According to top traders, a good mindset constitutes 80% of the total trading regime. As your robot covers this aspect, you can focus on the remaining 20%, i.e., strategy and risk management.
Is algorithmic trading legal?
Algorithmic trading is entirely legal. Some brokers have a cap on the number of orders that can be sent or modified within a specific timeframe. Before deploying your HFTs, it is vital to know about these metrics. Your broker may put a stop to your trading and hold your account in certain circumstances if you put a strain on their servers.
Risk Management
Risk Management involves planning your positions with an astute entry and exit. Their is a famous analogy in trading: “Plan to trade; trade your plan.” Top traders risk no more than 1-5% on any trade. Their take profit and stop loss are predetermined for each position. Various risk management tools, such as lot measurement, can help you analyze your risk on any given execution with the set stop loss and take profit.
| Profit factor or risk: reward ratio | Win ratio |
| 0.5 | 70% |
| 1 | 50% |
| 1.5 | 40% |
| 2 | 33.3% |
| 3 | 25% |
Table 1. The required risk: reward ratio and the associated win rate to stay in the profitable category are shown in the table.
Here are the benefits of risk management tools summed up:
- They can stop you from risking more than a certain amount on each trade. You percentage risk can be set up within a risk management tool. Any position that exceeds the set percentage will be canceled before being sent to the server.
- Stop loss and take profit values can be easily determined for a given risk percentage, eliminating the need for manual calculation. This can save time for traders, especially scalpers.
- Risk management EAs can adjust or enter your stop loss and take profit immediately after you place a position. They can also trail your stop loss as the trade moves into profit.
Image 3. Identifying a short trend, a trader decides to take a short position on EURUSD. They follow strict risk management rules and only take trades that offer a risk: reward ratio of 1:2. With such a profit factor, they require a win rate of 33.3%, as per Table 1.
Financial News and Market Data
Economic calendars and market data tools provide a sound way to familiarize yourself with the fundamentals. Some traders only prefer to use technical analysis. While it is sufficient in a few cases, it is essential to understand that key economic data drive the big market moves. Top brokers and VPS companies use a mix of these tools in their platforms. This can include an economic calendar and a level-two data feed.
Image 4. An economic calendar lists all the important financial events. It also marks the level of impact they would have. For eg NFP, which happens on the first Friday of each month, can cause a major shift in the US dollar-based currency pairs.
Availability of Tools for Professionals and Novice Traders
Professional traders have the edge over retailers when considering execution speeds, platform tools, institutional spreads, and immediate access to news. They also got top mentors and gurus on the trading floor to help them out in case of trouble.
Market participants who analyze their positions from home have more freedom as they are not bound to sit at their desks all day. They are also free to install customer trading tools without the permission of an admin.
Here is a good example of an amateur market participant making use of fundamental tools to trade EURUSD:
- A forex trader continuously monitors the news via an economic calendar. They receive an alert that the Fed is going to cut interest rates.
- Rate cuts are bound to make the currency weaker. Considering the fundamentals the market participant decides to go long on EURUSD.
- They place a swing trade with a stop loss at support and a take profit at the next resistance level.
Image 5. The chart shows the scenario where a trader places a swing trade on the daily chart of EURUSD. Here the FED decided to increase the interest rate, increasing the strength of the US dollar against the Euro. The financial forecasts, as observed by the economic calendar, were also in favor of the greenback.
Technical Analysis Tools
Trading platforms now have a bundle of technical analysis tools to help with your chart observations. In addition to the built-in indicators, thousands of free and paid EAs are available in the marketplace. Specific charting platforms like TradingView also have a bunch of technical analysis tools. You can develop one yourself as well if you have some programming knowledge.
Which type of analysis tools should you use in trading?
The kind of analysis tools you use comes down to your personal preference when choosing the type of trader you are. Trading using fundamental tools may require a lot of effort from your side, and you may need a guru to understand the volatility and reactions generated by news events. On the other hand, mastering technical analysis might be easier for some.
Utilizing both technical and fundamental tools is a known way to increase your performance in trading. You can take new positions or close your current ones by analyzing if the currency’s economic outlook matches the one from your charts. Use the proper news event to select a stock or currency to trade and then employ technical analysis to time your entry and exit.
One of the good example of using both fundamentals and technicals is news trading. Traders capitalize on the volatility generated by top market events. They can then assess the movement of 1M, 5 M, 15 M, and 30 M candles that form just after the financial statement release to place a long or short trade.
Popular Technical Indicators
Some of the most popular technical indicators are listed below:
- Moving averages: MAs are used to identify the market trend and support and resistance levels. It is a lagging indicator and is applicable to most financial instruments i.e. stocks, forex, futures, bonds etc. 20, 50 and 200-period moving averages are mostly commonly implemented on technical charts.
- Fibonacci retracements: Derived from the Fibonacci sequence, the retracements consist of horizontal lines indicating potential support and resistance points on the chart. The most common Fibs retracement levels are 38.2%, 50%, and 61.8%.
- Relative Strength Index: The RSI indicator indicates overbought and oversold conditions in the market. It has a range from 0 to 100 with levels above 80 highlighting overbought and below 20 marking oversold conditions. The indicator is useful for determining potential reversal points in the market.
Other popular technical indicators that traders may note are MACD, Bollinger bands and Stochastic osciallator.
Image 6. A moving average with a value of 50 is plotted on the daily chart of USDJPY. Notice how the market bounces off the MA. Some traders use confirmation from several technical indicators before placing a trader. For eg as the market makes a new high and approaches the 50 periods MA, the RSI may be over 80, indicating overbought conditions. A bearish engulfing candlestick pattern further confirms the short bias on this position.
Social Trading Platforms
Social Trading involves copying signals or trades from one portfolio to another. It may also come under asset management when the client agrees to share their account credentials with the signal provider to mirror trades automatically.
Copy trading tools such as a forex copier might be a way to generate passive income. Here are some general benefits of these tools:
- These instruments copy trades with specific risk management, such as take profit and stop loss.
- Traders can set their slave accounts to enter at a better quote than the parent platform.
- It does not require any market experience if you are copying trades from a pro. All the positions are opened and closed by them.
- Investors have an opportunity to diversify their investments.
Can I set up a copy trading platform within a Forex VPS?
Yes, you can set up slave and master accounts within a Forex VPS. It would depend on the signal provider if they are trading on a VPS or a private computer. A VPS may be a better choice here, as you can log in to the portal and observe the live positions.
Backtesting and Trading Communities
Paper trading and backtesting are used to test your strategies on historical data. These tools are available via third-party applications or are present on your trading platform. Depending on the functionality of your algorithm, you may be able to tweak settings to stop loss, take profit, slippage, etc.
While using a backtesting tool, make sure that you can adjust the initial deposit, time frame, and spread. This will allow you to test your system in various market conditions. Advanced software also includes optimization options, which are helpful when you need to stress test multiple parameters.
Image 7. The strategy tester of MT4 allows you to tweak various settings. Traders have access to seven timeframes, including M1, M5, M15, M30, H1, H4, and daily. They can also set the dates they’d like to test their algorithm or indicator. Optimization options are available as well along with symbol properties.
VPS servers can aid a lot in historical testing. As the procedure requires a lot of computing power, it can drain your personal system resources, making it unusable. As the VPS service is set in the cloud, there is no strain on your hardware. Modern VPS servers also have load balance and are optimized to increase the allocation of resources in case of high CPU and RAM consumption.
How can trading communities act as an essential tool?
Trading communities are a hub for novice and professional traders to meet and share their market insights. While this gives beginners a chance to learn, pros can get a new point of view from other traders at their level. They can also provide exclusive access to their private channels at some cost.
These channels may act as motivation and psychological support. The collective contribution of members in sharing real-time news, market updates and signals can also help traders stay up to date with the current trends. Market participants can also share their backtesting results and get feedback from others.
How do I read the report from my backtesting tool?
A historical test report produced by your backtesting tool can be used to predict future performance. It includes important metrics such as gross loss, net profit, number of trades, modeling quality, win rate, and absolute and maximal drawdown. Here are a few essentials that you should consider while reading a report:
- The testing quality should be close to 100%
- There must be minimal mismatched chart errors
- You have to be in an overall profit, i.e., the gross profit should exceed the gross loss
- The win rate and profit factor should be in accordance with Table 1
- Your maximal and absolute drawdown values should be under control
Image 8. Backtesting records of a random system. The algorithms tank in a yearly average profit of 111.8% with a drawdown value of 10.7%. This algorithm has shown pretty good results. Traders should keep in mind that there can be a huge difference between live and backtest records due to market slippage. Historical records also don’t take economic events into account.
You can see the equity and the balance graphs to determine the type of strategy implemented in case of an EA backtest. A sharp difference between the two curves depicts the implementation of grid and martingale, which are risky approaches.
Final Thoughts
Having the right trading tools at your disposal can be a conclusive factor in determining whether you are a successful trader. The eight tools we have gone through–Forex VPS, trading platforms, algorithms, risk management tools, financial news and market data feeds, technical analysis tools, social trading platforms, and backtesting are all essential to make sure that you have the edge in the market.
As the technology grows and AI takes over, novice traders will have access to more institutional-grade tools previously exclusive to hedge funds and large banks. Traders should engage themselves in continuous learning via free or paid resources to stay updated with the latest market trends. It is also important to remember that no tool can eliminate the risk of trading. Journaling and developing your craft can aid in protecting your capital from unnecessary losses.
In the end, traders may combine all the tools discussed above. Use technical analysis with news, trading algorithms, social trading and sound risk management within a forex VPS to craft the perfect strategy.
