FX Trading Lesson 2: Forex vs. Stocks – The Ultimate Showdown

Sorry to disappoint, but there’s no showdown…it’s more like a back-alley beat down. I’m a Forex trader, what would you expect? 🙂 But really, when it comes to Forex vs stocks there isn’t a ton of competition.

I agree that stocks still have their place in the world. When it comes to trading I choose Forex over the stock market every day of the week.

Here are the top 5 reasons why I like Forex over the stock market.

#1 Opportunity – Market Hours and Overlap

FXTradingLesson2-1Being able to trade the Forex market 24 hours a day and 5 days a week can be a great advantage over the stock market, which is only open 8 hours a day and 5 days a week. The real advantage here is not being able to trade around the clock, but rather having 5 days of trading where there are no opening gaps in the morning. This means you can hold a trade overnight in the Forex market without worrying about a huge gap in the morning, which can and does happen in the stock market.

While the ‘around the clock’ trading ability of the Forex market can be a major advantage, to the untrained Forex trader it can be an absolute curse. It can easily turn into long nights of staring at your screen watching every tick, biting your nails with anxiety. Trust me, I’ve been there!

#2 Simplicity – Major Pairs Make Trading Simpler

When it comes to Forex vs stocks and simplicity, there’s no comparison. This is because the eight major currency pairs account for the majority of market volume. This is compared to the more than 2,000 listings on the NYSE alone!

This allows traders to focus on fewer trading instruments while still providing plenty of trade setups.

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#3 Liquidity – Money Movement (Forex vs. Stock Market)

FXTradingLesson2-3When comparing Forex vs stocks, the volume traded in the Forex market is substantially higher than that of the stock market. This means that under normal circumstances orders are filled with ease and there isn’t a large bid-ask spread. Now, unless you’re trading Warren Buffet’s bankroll you aren’t going to have an issue getting your order filled in terms of market liquidity. However, this does mean that the bid-ask spread will tend to be lower in the Forex market than the stock market. This is critical especially as your position size increases

Being able to get in and out of the Forex market without worry is a huge advantage over the stock market. Take a look at the image above to get a feel for the massive discrepancy in liquidity between the Forex market and stock market.

#4 Market Growth – Heading in Opposite Directions

Yet another disparity between Forex vs stocks where Forex takes the day. The volume in each market is moving to opposite ends of the spectrum. In other words, volume in the Forex market is flourishing while volume in the stock market is slowing. Forex has been growing steadily for the past 15 years, while the stock market has returned to pre-2006 volume.

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#5 Profit Potential – Forex vs Stocks

Leverage in the Forex market can turn small moves into large profits, and large losses if you aren’t careful. This is why having a coach to teach you how to trade price action is critical to your success as a trader. Take a look at the graph below. This shows two $2,500 investments – one a stock investment in Tesla Motors, Inc. and the other in AUD/USD utilizing 20:1 leverage.

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In the image above, we can see that Tesla rose by 234%, which is extraordinary, while the AUD/USD currency pair changed just 11%. However, due to leverage in the Forex market the profit was the same between the two instruments.

As stated above, the leverage in the Forex market can be a great asset, but only if you know how to use it properly. Far too often I hear about traders abusing leverage which usually leads to losing more money than they bargained for.

#6 Long or Short (Buy or Sell) – You Choose long or short

FXTradingLesson2-6Anyone who knows me will tell you that I like to save the best for last. This is by FAR my favorite aspect of trading Forex vs stocks. The ability to make money regardless of which way a particular Forex currency pair is trending is a great asset to the Forex market. What this means is that while you may need 20 stocks to make up a decent ‘watch list’, you may only need 10 currency pairs. This is because, due to the fact that Forex currency pairs can be traded long or short, they essentially give you twice as many trade setups as a single stock in the stock market.

While you can go short in some cases in the stock market, you’ll need to jump through a few hoops with your broker to do so. Going short on a stock is also viewed as unethical by many, since you are essentially hoping that a company under performs. An extreme example of this was the shorting that took place to Lehman Brother’s stock in 2008.

When it comes to the Forex market, the debate of whether to go long or short is irrelevant; the only thing that matters is finding the right price action trading strategies to trade.

In closing, when it comes to Forex vs stocks I think Forex beats the stock market hands down. I’m obviously a little biased being a Forex trader, but when you compare the advantages over disadvantages I think you’ll find that Forex wins out. Whether you decide to trade Forex or the stock market, I strongly urge you to find an experienced coach who is actually trading using the strategies he/she teaches.