Stock Trading vs Forex Trading
Forex trading has gained tremendously in popularity of late. This is due mostly to investors’ disillusionment with stock market performances, which have become unreliable and can’t seem to bring the financial returns they did in the past.
Stock traders can move over to Forex trading quite easily. Opening a Forex account takes only minutes and trading can begin immediately. But can a stock trader be as successful in Forex trading as he was buying and selling on the Nasdaq?
Forex trading and stock trading are similar in some ways but there are some major differences which need to be addressed.
Firstly, a trader must get used to the fact that unlike Wall Street with its brick buildings and trading floor, there is no physical Forex market. It exists only in cyberspace. Stock markets are open specific times of the day whereas Forex markets are available for trading 24/5 at all hours of the day. The Forex market is considered the largest in the world, with over $2 trillion in trades daily. See more on Markets.com
A major difference between stock brokers and Forex brokers in the amount of margin made available to traders. Margin or leverage is the amount of money the broker “lends” to the trader to enable him to place more trades. Not everyone trading on the stock market makes use of margin or leverage which is usually not more than 50% of one’s capital. But when it comes to Forex trading, leverage can reach as high as 200:1. What this mean is that when trading stock, an investor with $5,000 can use margin to trade up to $10,000. A Forex trader with the same $5,000 can trade up to $500,000 using 200:1 leverage. He must never forget, however, that he can lose his money in the same proportions!
Another difference between trading stocks and Forex is the choice of assets. There are over 13,00 stocks to choose from, in addition to mutual funds, ETF’s and more, while there are basically only eight major currencies (7 currency pairs ) to choose from in Forex.
A majority of stock brokers do not charge commissions for their trades. Neither do most Forex brokers. Keep in mind, however, that nothing is for free and that the broker is certainly making money off your trades. His “commission” is made by the ask/bid spread. With Forex, it works like this: The market maker pays you less for a currency than the price for which he will sell it. For example, you may be able to spend $5 in U.S. currency to purchase $5.0905 in Euros. But when you want to buy back the Euros, you will have to pay more than five U.S. dollars to get back your 5.0905 Euros. The difference between the buy and the sell price goes into the broker’s pocket.
Both the stock market and use technical analysis and financial indicators as tools for predicting the movement of the market. Candlestick graphs and Fibonacci analysis are used for both markets.
In addition, stop losses, limit orders and other types of limitations in both markets are used to set the maximum price a trader is willing to pay as well as the maximum amount he is willing to lose.
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