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.

What is the Taper, and How Does it Effect my Trading?

Fears of high volatility and price corrections in the Forex, equities, and bond markets are due to the recent "Taper" speculation set in by Fed Chairman Ben Bernanke. You ask, what is "Tapering" and why is it important? Tapering refers to the method used by the Fed to gradually decrease their monthly purchases in their recent stimulus buyback program, better known as quantitative easing (QE3). QE3 started back in the Fall of 2012, allowing the Fed to purchase $85 billion in Treasury Bonds and Mortgage Backed Securities. The purpose of this stimulus package is to promote growth in the economy by lowering interests rates.

Looking at the markets performance over the past year we can see how QE3 effected the equities.

With the Fed pumping US Dollars into the economy, the market became more comfortable with risk in equities causing this bullish uptrend and high returns. However with a possible "Tapering" ahead, we can assume that a significant correction to the downside may come. As the Fed gradually decreases the supply of US Dollars, investors will want to hold more dollars, causing an increase in demand for US Dollars with a decrease in demand in the equities market. For the Forex market, the USD will play a pivotal role in the speculation. Theoretically we can expect a spike in the USD due to speculation of decrease the supply of US Dollars in the economy (tapering).

Speculators are predicting for tapering to start in the Q1 of 2014. Therefore expect prices to correct themselves now for the events expected to happen later. 

A Strong Foundation is Key

Many new traders to the markets make the mistake thinking that since they read a few articles on trading and now how to read the prices on a chart that it's time to start trading. It may sound crazy, but the mistake happens more than you may think. This one of the contributing factors to why 90% of people who start trading fail. They think that everything is a get rich quick deal, and they end up forgetting how important it is to EDUCATE yourself in the markets. As an up and coming trader it is important that you develop a strong foundation in education for trading and how to analyze the markets.
The two basic types of analysis for understand and predicting price movements are:

• Fundamental Analysis: In Forex, this type of analysis is used to measure the different contributing factors to supply and demand of these currencies. With stocks you look at the measurements of the company, but in Forex you look at the economic reports of different countries. A few may include GDP, inflation, trade balance, political events and more. Events you may see on the evening news can help you to earn money in the Forex Markets. .
• Technical Analysis: Every chart tells a story, and like many believe that history repeats itself. The technical side of trading involves analyzing price patterns and using charting techniques to create profit opportunities. 

It is important to not only educate yourself, but apply what you learn in sync with a demo account that allows you to trade with "play money." By doing this you will be able to realize how the markets work and at the same time continuing your education. 

Example of Technical Analysis

Dollar Weaker Than Expected Due To Slow Start To US Holiday Season

The amount of of shoppers over the Black Friday weekend saw record highs, however, the amount of spending showed the first decline since 2009. American consumer spending has dropped almost 2.9% this season. What does this mean for the dollar? It does not have the strength that many think it does. This can be seen in the futures prices for the USD. It is in a down trend since the initial spike after Black Friday weekend!

The Pros of Trading Currencies vs Stocks

When the everyday person comes across the topic of investing or trading in the markets, the first thing that comes to mind is the Stock Market. Why? Because it is the mainstream asset we see in commercials, movies, advertising, and what most people talk about. Therefore its normal to have a bias towards starting in this market since it is what you have been exposed to the most. If you are someone who is or looking to start trading and investing yourself (a "Retail Trader"), I'm here to tell you that the stock market is not the way to go unless you are looking for long term plays.
I have been on wall street and seen how large banks and hedge funds make it extremely difficult for the Retail Traders (us) to turn a profit. I have also experienced it myself. Large banks compete each day, buying and selling different stocks in the with hundreds of thousands of dollars per trade. They do this to be the largest holders of these specified stocks to help make the stock liquid to route to hedge funds. Because of these constant high end purchases, high price swings occur, creating higher volatility and risk for the retail trader in the short term (intraday, weekly). The Forex Market allows retail traders to avoid this manipulation of prices.
The foreign exchange market, commonly known as the Forex Market, is the largest financial market in the world. The Forex market has an average daily trading volume of over $5 trillion compared to the largest stock exchange in the world, the New York Stock Exchange (NYSE), which has a daily trading volume of $60 billion. The Forex Market offers many advantages that other markets don't, or may not on a consistent basis:


1) No Commissions  
2) Trade in any direction of the market without special capital requirements
3) 24 Hour Market
4) Leverage
5) High Liquidity 
6) Globally Connected
7) Low Capital requirements to open an account. 

To the right you can see a comparison of the some of the differences in trading Stocks vs. Forex.