The Benefits of Trading Forex Over Trading Stocks
Which is a better market to trade, Forex or Stocks? A professional trader will probably make money regardless of the market as long as there are enough buyers and sellers in that particular market to produce meaningful trends every day or week or month. In fact, changing markets constantly is not healthy for the trading account performance. It is always best to stick to the market or few markets that you know best, have tested enough and feel comfortable trading.
In life and in brick-and-mortar business, I’m not big on the comfort-zone thing. However, in trading, it is a different matter. You have to be comfortable with the markets you trade because it will otherwise affect your psychology and state. Luckily though, you can build that sense of comfort by back testing and forward testing (small sized trading or demo trading) that market.
There are also certain practical or “mechanical” specifications of a market that make it better, easier or safer to trade than other markets. Among these are liquidity, ease of access, availability of information, flexibility, time constraints and sensitivity to outside events. In this article we are discussing the benefits of trading the Forex market versus trading in the stock market.
Liquidity and Trading Volume
The Forex market is without question the most liquid market in the world. The total daily average trading volume of the Foreign Exchange market is more than $3.5 trillion – which is more than 12 times the trading volume of the all the stock markets combined! Not only that, but the liquidity also stays high in the Forex market throughout the trading day. This is because as every major market or financial center approach the end of its trading day, trading starts in the next major market. An example of this “overlapping” quality of the Forex market is when there are 3 hours left to the close of the London market, New York is just starting to trade again, and so on. I’ve also talked about overlapping in the Financial Markets Trading Hours Guide.
Going Long or Going Short
When it comes to selling short stocks, very few people do that. Sometimes, the mainstream even criticizes speculators who do that. In currencies, it is much easier to go long or short a certain currency. The reason for that is selling short a currency is psychologically more acceptable. Think about it, who hasn’t borrowed money at least once in their life time? Well, selling a currency short is the same thing, only with the added bonus that when the price of that currency declines, you can buy it back at a lower price and bank the difference as profit.
In addition to that, currencies are always quoted in pairs. Therefore, in a Forex pair when you are selling a currency short, you are also buying the opposite currency in that pair.
Trading Hours and Schedules
Whereas the stock market opens and closes according to business hours of its country, the Forex market is open 24 hours a day and is largely known for its geographical dispersion.
The advantage here in Forex is that if big spikes happen in the after-market hours on some news release and you are a day trader, you have the option of adjusting you trading positions or even opening new ones immediately as opposed to waiting for the market to re-open the next day.
Although not so long ago some stocks started to trade 24 hours, I still see spreads getting very high in the overnight sessions. After all, brokerage companies need to protect themselves in times of such thin trading and low liquidity.
More Advantages
Another great thing about the Forex market is there are a few major pairs to trade and follow the news of. You don’t get overwhelmed as with the tens of thousands of stocks each belonging to their own sectors and responding to that sector’s news or even worse; news that is specific to the stock or company behind the stock. There is just too much research work to outsource here since following all these different news and variables is almost impossible to one trader – if not to one machine!
In Forex, the news following gets to be much more simple and straight-forward. If you trade one pair of currencies, you need to check the most important economic news and headlines of the two countries representing the pair. More often than not, I’ve seen news in Forex acting as a trigger to what the technical analysis has been expecting. Whereas in stocks, news most likely cause large gaps, a sudden change of direction and generally knee-jerk trading behavior.
Macro Trading Instrument
Currencies are considered a good tool for macro trading, which is investing on a large, global scale using economic theories in the financial instruments and derivatives to take advantage of international trends in the world’s financial markets.
Although currencies are volatile – which is good for aggressive traders anyway – they basically experience good trends that last for relatively long periods of time.
Conclusion
The benefits of trading currencies in the globally accessible Forex (FX) market are huge and outnumber those of stock and equities trading. It is good to at least consider adding diversification to your portfolio by exposing it to the currency markets. However, as with everything else in trading, it is a matter of your own personal preference, risk tolerance and diligence in the end.
Wishing you happy and profitable Forex trading,
Ramsi
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