Once a Trader, Always a Trader
by Trade_nut (Tradealike Platform)
I have followed the stock markets in one way or the other for the past 17 years ever since I graduated from College, but never got to investing or trading in them actively till the last year. I have been an active Forex trader for the past 11 years & that was perhaps one of the reasons why!
Forex trading kept me so busy 6 days a week 24/7 that I never got around to thinking about trading stocks. Both markets have their own dynamics however, which one needs to understand before trading either or both of them. You can decide which one to trade based on your trading habits, risk profile & investment amount.
I transitioned from being a Forex trader only to trading stocks as well based on certain factors, which prove useful for you to make a decision if you ever contemplate one. The underlying strategy — trading off technical levels — that I used in Forex trading is as effective in stocks as well.
Technical Levels: Technical studies are based on chart patterns, which work similarly in both financial markets with some subtle differences — Some of the most common ones are Support/Resistance levels, Fibonacci retracements, bullish/bearish channels & moving averages. As a matter of observation I have seen that volume backed moves in stocks are much more convincing & long lasting than FX. Also lagging indicators (e.g. MACD) in Stocks are considered more reliable than Forex trading where a leading indicator like RSI provides a better confirmation of the upcoming move.
Fundamental Studies: I rarely trade Forex or Stocks for that matter based on fundamental factors — economic data releases (GDP, Employment numbers, CPI etc.) in FX market or earnings reports, forward guidance or upgrades/downgrades in Stock market, they play a significant part in shaping the technical levels. The risk with trading fundamentals is that they cause volatility & knee-jerk reactions, which are not lasting & can easily reverse, resulting in major losses for your portfolio.
Let’s look at some of the other major differences, which can help you decide if you are comfortable trading one or both the financial markets.
Choice: Although Forex market offers hundreds of cross pairs to trade, more than 80% of the transactions in the FX market take place in the 7 pairs called the Majors, which include EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CAD, USD/CHF & NZD/USD. These pairs have the highest market liquidity of all the rest (about 80%) & thus offer ample opportunities to trade. With the stock market however, you are looking at thousands of stocks to choose from & than making a decision based on the micro economic factors like growth potential, sector performance, seasonality & P/E ratio etc.
Liquidity: Forex market is the most liquid market of the world with the liquidity of $5 trillion, which is almost 10 times more than the liquidity of all stock markets combined — since FX trading is done OTC (over the counter) it gets executed more quickly than stocks where a broker is involved as a middleman. Also there are significant fees involved in stocks trading like brokerage fees, commission etc. while in FX you just pay for the spread.
Timing: Forex markets are open 24/7, which can be distributed into 3 sessions — Asian, European & North American trading hours. Basically what that means is when one is closing the other one is opening & this goes on from Sunday night to Friday evening around the clock. The stock markets around the world usually trade around 7–8 hour day time sessions (in local hours) & you can only trade during those times with some flexibility of trading in extended hours albeit with diminished liquidity.
Volatility: This is perhaps one the most important differences between these two markets & why people choose one or the other. FX markets are much more volatile than stocks & volatility acts like a double-edged sword where on the one hand it presents multiple opportunities to trade & gain from these movements, it can easily go against you as well. Stock markets have generally been known to be more stable & less volatile, on the downside however you have to hold positions longer to profit.
Leverage: The biggest & perhaps the most important difference between both kinds of trading is the leverage. While in stocks you generally get a leverage of 1:3 to 1:5 — in Forex the same is 1:50, 1:100 or even 1:400. The table below shows how this stacks up for an average investor in terms of purchasing power. The kind of leverage you have basically determines the buying power of your portfolio.
I would like to mention a little bit about Crypto currencies to wrap things up, which is the new craze in the trading world. Cryptos get traded 24/7 without any interruptions. They are the most volatile instruments, not regulated & price quotes also vary on different exchanges — no wonder they are called Wild West of the trading world!
Remember no matter what you are trading money management is the most important tool for traders if you want to stay in the game & not get burnt. Trade according to your risk preferences with proper money management. As a rule of thumb you should never trade more than 1–3% of your total portfolio on any single trade. Smart traders keep emotions away from trading, follow their trading plan & risk only what they can afford to lose.
I post my trade ideas for stocks, Forex & Crypto currencies on a daily basis if you want to follow me on twitter or stock twits — Trade Nut signing off!
