With only a stable Internet connection, retail traders have access to financial markets. But with global markets at their fingertips, what is best: trading in Forex or trading in stocks? Or both?
Before anything, trading financial markets isn’t for everyone. The recent rise and fall in the cryptocurrency universe is the best example.
People depleted their savings to pile on the long side as the FOMO (Fear of Missing Out) sentiment prevailed. Some sold their house and put everything in the “new gold.”
However, the same people have a problem now. Most likely, they face bankruptcy. The market retraced over sixty percent from the highs.
What is the lesson to learn here? There’s only one answer: diversification.
When diversifying a portfolio, traders manage risk. What risk, you might ask?
The risk of something like above won’t happen to the trading account. Because of greed, retail traders still look at financial markets as the place where they’ll get rich.
However, can you get rich trading Forex? Do you know what it takes for successful trading in Forex?
Or, what is stock market trading? And, is it similar to FX trading?
The same questions apply to any market. Why would anyone trade a market if he/she doesn’t know the ins and outs of it?
This article aims to:
- Explain what trading in Forex is
- Show how to trade on the stock market
- Pros and cons of trading in stocks
- Compare trading in Forex vs. trading in stocks
But, above all, it aims to answer questions like:
- Is Forex trading profitable?
- How to profit from trading in stocks?
And, how to avoid taking unnecessary risks. After all, that’s what trading is, right?
Trading in Forex
Currency trading is so popular today that everyone heard of the Forex market. But do people understand the foreign exchange trade?
The financial system as we know it depends on the USD. Because it is the world’s reserve currency, the entire Forex market depends on its valuation.
Therefore, trading in Forex implies trading the USD. You might disagree with this statement, but:
- Sovereign states build currency reserves in USD
- Oil and significant commodities have the price in USD
- IMF (International Monetary Fund) and other big financial institutions mainly lend in USD
Hence, what happens with the USD matters for the world. And, it matters when trading in Forex too.
As the largest financial market in the world, the foreign exchange market has an impressive turnover. Over five trillion (with a T!) dollars change hands every single day!
Because of the enormous volume, it makes it difficult for any single entity to manipulate prices. Hence, trading in Forex is the purest manifestation of technical and fundamental skills.
The Forex market is the place where the world’s currencies fluctuate against each other. In economic terms, they free-float.
The so-called fiat money in the free world has different valuations around the globe. Because every currency represents an economy’s strength or weakness, trading in Forex implies making economic comparisons.
That is, comparing two economies and selling or buying a currency based on the outlook. A growing economy triggers higher interest rates.
Hence, the fiat currency becomes attractive. As such, traders have a bullish bias. They want to own the currency.
So, they buy. Or, go long.
A slowdown in economic activity leads to lower interest rate levels. Inflation falls, the currency weakens.
Traders sell the currency. They go short.
But, the problem is, against what currency to buy or sell?
Is Forex Trading Profitable?
Sometimes, a currency appreciates only against some currencies. And, depreciates or losses value against others.
The first quarter of 2018 illustrates it perfectly. The Euro, the Eurozone’s common currency, rose against the commodity currencies (CAD and AUD).
Here’s the EURAUD 2018 price action. It shows a huge bullish trend. It rose almost a thousand pips.
How about EURCAD? The other commodity currency (CAD) fell like a rock against the Euro. Over a thousand pips in a robust and bullish trend!
However, against the USD, the Euro consolidate. For the entire first quarter of 2018, it stood in a narrow range.
Therefore, is Forex trading profitable? Yes and no.
Yes, if you trade the right instrument. Or, the one that moves, if you’re a swing trader or investor.
Yes, if you trade the right instrument. Or, the one that sits in a range, if you’re a scalper.
Hence, a swing trading or investing strategy made money on the long side on EURAUD and EURCAD. But, lost on EURUSD.
Moreover, a scalping strategy proved disastrous on EURAUD and EURCAD. But, it made money on the EURUSD pair.
As such, trading in Forex is not about a single currency. Instead, it is about a currency pair and its valuation against other currencies.
The Forex dashboard revolves around the USD. As its pillar, the USD volatility affects a trader’s profitability.
When the USD doesn’t move, nothing moves. Hence, to make a profit when trading in Forex, traders need to understand what moves the USD.
Here are some things to consider:
- Inflation –
- CPI – consumer price index
- PPI – producer price index
- Jobs data
- ADP – private payrolls
- NFP – non-farm payrolls
- jobless claims
- unemployment rate
- AHE – average hourly earnings
- GDP – gross domestic product
Technical Analysis in Forex Trading
Besides the above, general economic data on:
- Consumer’s health
- Construction sector’s performance
- Manufacturing and services sectors data will help to build the big picture.
However, an analysis like this helps to interpret ALL economies. Hence, traders use the same criteria to compare different economies.
Next, they look at how the currencies appear grouped on the Forex dashboard. Finally, they buy or sell a currency pair (not a currency) based on economic differences.
But, that sounds a bit complicated, right? Not everyone is an economist.
Moreover, some people don’t have time to monitor economic data. So, what’s the solution?
Is it one? Fortunately, trading in Forex works from a technical perspective too.
Technical traders use charts to interpret markets. They check the information on the left side of a chart to project future levels.
Any Forex broker offers access to a trading platform with an entire range of trading tools to use. Here’s a list, to name a few:
- Trend indicators
- Bollinger Bands
- Ichimoku Kinko Hyo
- Moving Averages
- Parabolic SAR
- RSI – relative strength index
- MACD – moving average convergence divergence
- Fibonacci tools
- Time zones
- Andrew’s Pitchfork
- Gann tools
- Trendlines and channels
- Trading theories
- Elliott Waves
- Point and Figure
- Dow Theory
Depending on the trading style, each tool has a purpose. For example, the Elliott Waves Theory doesn’t work without Fibonacci tools.
Moreover, scalping fails and swing trading or investing works when counting waves.
On the scalping side, oscillators do a great job. Either buying oversold or selling overbought; scalpers observe them.
In the end, trading in Forex is about:
- Understanding the market
- Picking the right strategy
- Using risk management
Trading in Stocks
Trading stocks differs. In fact, the two markets vary so much, that the procedure to approach them varies too.
Equities or stocks move for a different reason. On the one hand, there’s company related information.
On the other hand, there are general monetary policy decisions that affect trading on the stock market.
If you want, the monetary policy is the common ground for trading in Forex and trading in stocks. Fundamental and technical analysis work too, but:
- Economic data to interpret differs
- Technical analysis tools differ
A general trading in stocks approach implies the now famous “buy and hold”strategy. Warren Buffett, the renowned investor, is an avid pursuer of it.
And, it proved him right. He continuously bet against the doomsday, buying stocks on any cyclical dip.
When deciding to trade stocks, first decide on what to trade: individual stocks or an index. Next, find out what matters for the two categories. Finally, make the right decision based on the trading plan and style (scalping, swing trading, investing).
Trading in stocks implies buying or selling a piece of a public company. Companies decide to list part or all their shares on a stock exchange, to raise capital for expanding the business.
Therefore, anyone can own a piece of a company. Or, a share of it.
Ever seen something you like, like a T-shirt, a personal computer, or a boat? Chances are you can find shares of the companies owning them. And, just like that, you’re involved in the stock market.
Trading in stocks has different “frictional expenses”. In plain English, the fees and commissions differ than trading in Forex.
Trading in Forex has the same rules for both long and short positions. However, when trading in stocks, one exposes to unlimited liabilities if on the short side.
Individual Stocks to Trade
Unlike trading in Forex, trading in stocks offers the possibility to earn a dividend. As such, the dividend yield or the dividend size plays an essential role when picking a stock to trade.
When trading an individual stock, traders check a company’s:
- Types of shares offered (g., preferred, common)
- Financial statements
- Income statement
- Shows info related to
- Profit and loss
- Balance sheet
- Shows info related to
- Cash flow
- Shows info about
- Cash inflows
- Cash outflows
- Retained earnings
- Shows changes in equity, like
- Sale of stock
- Dividend payment
- Shows changes in equity, like
- Shows info about
- Shows info related to
- Shows info related to
- Income statement
The first to are the most important ones in valuing a company. Other things like earnings per share and various ratios help too.
Because any company listed on a stock exchange is public, the info is public information. Hence, anyone can find it and use it for his/her own purposes.
Internal news influences the price of individual stocks too. Not one, insider trading held the headlines on Wall Street.
All these, and much more, are pieces of information to know about trading in stocks. And, they don’t exist when trading in Forex.
Traders must be aware of the earnings calendar too. Every quarter, public companies release financial statements.
They provide a great deal of volatility in the price of a stock. Moreover, some companies release the earnings statements after hours, when the market is closed.
Low liquidity levels make the price swinging hard. As a result, short-term oriented strategies have little chances to survive in such an environment.
Changes in management influence the price of an individual stock. CEO’s (Chief Executive Officer) and CFO’s (Chief Financial Officer) come and go, and the market interprets the moves as positive or negative for an individual stock.
How to avoid following all the things listed above? Luckily, indices exist.
An index is a weighted basket of various individual stocks. Most known indices around the world are:
- Dow Jones – United States
- S&P500 – United States
- Russel – United States
- Nasdaq – United States
- Xetra Dax – Germany
- Cac40 – France
- Ibex – Spain
- Nikkei – Japan
In this case, trading in stocks means buying or selling an index. The Dow Jones in the United States, for example, has thirty companies in its componence.
The companies listed belong to various economic sectors, like:
- Financial services
Hence, trading in stocks via an index gives exposure to different industries. Therefore, traders reduce the risk of being exposed to one single company and industry.
However, trading an index bears many similarities with trading in Forex. The monetary policy in that jurisdiction affects the value of a stock and stock index.
For example, assume the central bank starts a tightening cycle. More precisely, it starts raising the interest rates.
Typically, there is an inversed relationship between tightening and the stock market. Namely, stocks don’t like higher interest rates.
However, some stocks do. For example, financial stocks would benefit from higher interest rate levels.
Here’s Goldman Sachs one-year evolution, in the midst of the Fed tightening.
Trading an index might not give the same opportunities like trading an individual stock. But it provides protection against being too much exposure on one single company.
Diversification is key. Remember?
How to Start Trading Stocks
Trading in stocks starts with picking the right broker. Nowadays, trading in stocks can be done via a Forex broker too.
Stiff competition led to Forex brokers adding more products to a trading account. Therefore, besides the classic currency pairs, a Forex broker’s account also gives access to:
- Commodities trading (gold, oil, silver, and so on)
- Stocks trading (via CFD’s – contracts for difference, trading in stocks is available from a Forex broker’s account)
- Indices trading
- Bonds and options
Trading in Forex and trading in stocks from the same account has multiple benefits. One would be that traders use the two to diversify the portfolio.
For example, the trader can split the trading account into two parts: one for Forex trading and another one for speculating on the stock market. This way, traders diversify the market exposure and better manage the risk of losing the trading account.
Either from a Forex broker’s account or a stockbroker, you need a brokerage house to intermediate the transaction. Typically, fees for trading in stocks exceed the ones for trading in Forex, so that’s something to keep in mind.
Trading in Forex and trading in stocks have different particularities. In the end, both Forex and stock traders aim for the same thing: to make a profit.
However, the time horizon of their trades leads to different strategies. Some people look to accumulate wealth via a buy and hold strategy.
They save money from the regular day job and invest them in the stock market. By choosing an individual company’s stocks or one or multiple stock indices, retail traders actively participate in the financial market.
A Forex vs stocks comparison indicates that the Forex market is:
- More liquid
- More volatile
- Hence, offers more trading opportunities
However, the stock market is:
- Better regulated
- Gives access to a suite of trading tools and instruments that don’t exist in currency trading.
To sum up, the best way to trade stocks depends on each trader’s trading plan. Some traders buy stocks only for the dividend paid.
As such, they keep the stock until the dividend date, then promptly dump it. Other traders follow closely market analysts and reports regarding various companies.
For example, if a company announces a buyback plan (the company buys its own shares), that’s a bullish statement. Traders jump in and buy the stock for a buy and hold opportunity.
One thing traders keep forget: taxes. When trading in stocks and trading in Forex, any potential profit is taxed. Uncle Sam never sleeps, nor other financial authorities around the world.
Therefore, make sure you understand the real costs of trading in Forex and trading in stocks, before committing capital to a live trading account.