Friday, December 27, 2013

Is Trading Forex Like Trading Stocks?

Is Trading Forex Like Trading Stocks?

The quick and simple answer is “no.”

Trading Forex is different from trading stocks in many respects. In fact, it is different in almost every respect.

First of all, when trading Forex, you are trading “pairs,” rather than a single item. You can “pair trade” certain stocks and futures, as well. For example, you can trade corn vs. wheat, BMW vs. Mercedes, gold vs. silver, and many other pairs. But the only way you can trade Forex is in pairs.

The second big difference between trading Forex and stocks is that stocks tend to reverse directions fairly frequently, while Forex pairs tend to trend longer. A currency can be thought of as the economic strength of an entire country distilled into one trading entity. Thus, when you trade the USDCHF, you are considering the economic strength of the USA vs. that of Switzerland. The economy of a country doesn’t generally turn quickly, and neither does Forex. During most trading days, popular Forex pairs will remain within a fixed range. The EURUSD, for example, trades in a range of about 100 pips each day.

A third difference is the margin requirements. In Forex, the margin is typically 50:1. Stocks usually have a maximum margin of 4:1. This difference can be both useful and dangerous – useful because you can control more currency with fewer dollars; and dangerous because you can lose a lot of money very quickly.

There are other important differences, and we’ll discuss them in detail in the course.

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