Forex Trading Vs. Stock Trading: What Are The Advantages? Part I
Vadim Pokhlebkin: Jim, readers often tell us that they want to make money trading the markets. There are lots of options out there. Can you tell me why I’d want to look at forex and not, say, the more “traditional” stock trading? Jim Martens: First, currency markets are much larger than equity markets. By some estimates, the daily volume in forex is as much as 10 times larger than the combined volume of ALL ofÂ the world’s stock markets! So it’s a very liquid market. We’re also talking about a market that trades 24 hours a day. That means that if you are a short-term trader and the price spikes after a news story hits the wires after hours, you can adjust your existing position or enter a new one without having to wait until the market reopens the next morning, as you typically would with stocks. Sometimes you can do that with stocks too, but typicallyÂ the spreads (the bid/ask) after hours widen out, so you may have to pay extra to buy a stock that, for example, announced great earnings after the close of the equity market at 4 PM. Who is Jim Martens? Jim started with the Elliott Wave Principle in 1985. He first put that knowledge to use as a technical analyst at the COMEX Exchange, now part of the New York Mercantile Exchange. Jim came to EWI in 1993, first as a commodity specialist and then as a currency analyst. In 2001, he joined Nexus Capital LTD., a George Soros-affiliated hedge fund, as its technical analyst. A few years later, Jim rejoined EWI as the firm’s Senior Currency Strategist. On March 27, learn from Jim in person at the intensive 1-day forex trading course, “How to Use the Wave Principle to Maximize Your Forex Trading.” Click for details.
That’s not the case with forex. Liquidity stays plenty deep for most investors around the clock. Yes, there are moments when currencies are less liquid, but for most participants, liquidity is fine even then. Spreads stay tight, too — for example, for the euro-dollar exchange rate, or the EUR/USD, they are typically 2 pips (or points), and they may go to 3 pips when liquidity is not as high. But we do not see a major widening in spreads.
Secondly, I think the ease of the currency markets is a big advantage. How many stocks now trade around the world? Within the U.S., European and Asian stock markets, there are several dozenÂ industries — at least 40 of them, give or take, each with a number of sub-industries, and each one of those with 100+ stocks. So we’re talking about tens of thousands of stocks — and you have to choose the right one! While the rising tide may lift all boats, as the saying goes, it may not lift your particular “boat” — in fact, your stock may even decline if it’s not the best stock in its peer group, or if you’re in the wrong sector. Often, you see your sector or stock fall even as the general market rises, so you have to be very good — or lucky — at your stock picks. To me, the fewer choices in the currency market make my job much easier. Most forex traders stick to the major pairs; in fact, the bulk of trading is between the U.S. dollar and euro — by some estimates, up to 70% of the total daily volume. Besides the EUR/USD, we have 5 or 6 major other pairs — and now we are basically watching the entire world. Of course, we can expand into cross rates, but even then we’re still talking about a dozen, maybe two dozen markets versus thousands upon thousands of stocks. So currencies are just easier to follow in that regard. Thirdly, when you trade individual stocks, news plays a much bigger role — sector news, individual stock news like earnings, etc. With currencies, we focus on “the big story” instead. There are big data points coming out of each country; we generally know when they are coming out and are rarely surprised by them. (Trouble in Greece comes to mind as one example.) Lastly, forex offers flexibility to go long and short that stocks just don’t. When the broad stock market declines, most people are uncomfortable selling short — that is, selling a stock they don’t own in hopes of buying it back later, returning it at a lower price and capturing the spread. Most investors just don’t do that, even with some new avenues for doing so that became open in recent years: mutual funds, ETFs, etc. In forex, it’s a whole different story. Whenever we quote a currency market — take the EUR/USD, again — we are comparing one currency against the other; we are tracking the value of the euro against the value of the dollar. So we are always, in effect, buying a market! Yes, we are selling another one at the same time — but we are always buying the base currency, which is the first one in name of the pair. In the EUR/USD, the base currency is the euro; that chart tracks the value of the euro relative to the dollar. On the other hand, in the dollar-Swiss franc,Â or the USD/CHF, we track the value of the dollar relative to franc.
Forex markets have lots of volatility, too — good for aggressive traders. And if you’re a macro-trader, currencies are well-known for staying with the trend for a long time. Volatile at times, yes, but steadily trending. So, there are several reasons why one might look at forex.