How can you compare forex trading to trading individual stocks? The forex market and the stock market are equally simple to access, via the same trading account, but there are several key reasons why you might prefer one market to the other:
Your trading plan
Are you looking to make a small number of trades each with a significant return? Or do you want to make numerous short-term trades and rely on your risk management strategy to control your bottom line? What is your risk profile? Are you happy to increase your risk for the chance of a quick return?
Stocks, particularly blue-chips, are generally used for longer-term buy-and-hold investments, where your return will be determined over weeks and months. Picking which stocks to trade is often based on quantitative data like a company’s balance sheet or more qualitative factors such as the reputation of a particular brand.
By contrast, the typical volatility of the forex market provides a more suitable venue for day traders, looking to make a profit from short-term price swings with or against the prevailing trend. While the forex market supports many different trading styles, often you’ll find that forex traders want to spot patterns in the price history and have little interest in holding positions for any length of time.
Degree of leverage
By contrast, retail clients can trade major forex pairs at 3.33% margin, while professional clients can trade at just 0.5%. For example, if GBP/EUR was trading at 140.00, a professional client could open a £1 per pip position for just £70, representing a gearing ratio of 200:1. So your risk/return is 200 times the risk/return of the equivalent physical trade.
While leverage does maximise the return on your investment capital, you should note that it similarly maximises your risk and take suitable risk protection measures as provided by InterTrader.
Freedom of choice
The forex market and the stock market each offer freedom of choice in a different way. In the stock market you’ll find literally thousands of individual stocks to trade across exchanges worldwide, a staggering amount of choice even when you restrict yourself just to the blue-chips on each exchange.
Conversely, the forex market consists of a small list of major forex pairs and a slightly longer list of minor pairs. There are a fair number of currencies to exchange around the world, but nothing like the colossal number of listed companies to trade. And even then, forex traders tend to narrow their activities down to four or five heavily traded pairs.
So do you want to sift for trading opportunities among thousands of available stocks, or would you rather focus your attention on a small number of markets that typically produce significant activity?
On the other hand, the forex market provides trading opportunities right around the clock. While stock exchanges are ruled by opening and closing hours, you can trade your favourite forex pairs at any time during the trading week (Sunday 23:00 to Friday 21:15). Whether you prefer to trade when you return home from work, or you seek inspiration in the small hours of the morning, you are free to trade your way.
Size of the market
Why trade forex? Because the forex market is so vast, with $4 trillion traded on any given day, no single participant can have as great an impact on the market for an individual forex pair as they can have upon individual stocks.
If a large institutional investor buys or sells a stock this can massively influence the price in contrast to any trends you are tracking. Similarly, influential analysts can skew prices with their recommendations. You will have to account for these potential effects in your trading plan if you choose to trade stocks.
By contrast, the size of the forex market means that, under normal circumstances, it cannot be cornered by major players. This might help to give you greater confidence if you choose to trade forex.