Forex = Stock Market on Steroids

Submitted by Marco on 25 May, 2006 - 01:43

I compare and discuss the differences between forex market trading and share market trading

To be honest I haven't been trading the stock markets for a while now. It's not because the markets are in a downturn at the moment it was simply a conscious decision to give the forex markets a go using the same technical indicators I use in the stock markets in an attempt to make similar returns or more. And after a few months of currency trading I’ve concluded that the forex markets are simply like the stock markets on steroids from a traders' perspective.

From the eyes of an investor the stock market and the foreign exchange (forex) market are nothing alike. One has great long term growth prospects while the other is a high risk arena that basically stuck between a trading range. But for traders, especially technical traders, the forex market is simply the stock market on steroids.

The Australian sharemarket and other stock markets in the world are only open for limited hours. For example, the Australian Stock Exchange (ASX) is open from 10am to 4pm on weekdays excluding local holidays. This allows traders to take a breather and sleep. Hey, why don’t you look at the option market hours... They even close down for lunch! Compare this to the highly charged foreign exchange market that is open 24 hours a day and actively trades for about 5.5 days of the week, week in and week out.

The forex markets are basically stuck in a trading range. Theoretically currency prices can be controlled by governments (i.e. China) and be pegged to be valued at s certain point. Currency prices can theoretically double or triple but of course it is highly unlikely. Personally, I’ve never seen it happen and it doesn’t make practical sense that the currency price would instantaneously grow at that rate or depreciate at that tremendous rate. So let's conclude that currency rates are basically stuck in a trading range most of the time (we’ve got stops to protect our capital anyway). The consequence of currency rates being suck in a trading range is that the currency values are cyclical in nature. With stocks you can hold for a lifetime, with the hope of their stock value would be consistently increasing; with forex you cannot do that. There is a limited timeframe for a forex investment or hedge position. This price action is similar to other cyclical equities in the futures market where the price of heating oil would increase as demand would increase in the American winter.

So are you willing to trade a market on steroids? It really depends on what you want to get out of trading. Share trading allows you to rest, with only six hours of active trading during business days. There are less windows of opportunity but the quality of your technical analysis would increase since you have more downtime to think and analyse. Forex trading offers 24 hours of trading from Monday morning in New Zealand to Friday afternoon in New York. There are more windows of opportunity to trade since the markets are volatile and the quality of your technical analysis is arguable. The stock markets allow traders with an investment portfolio to hold dead stocks for the longer term in the hope of a return while the forex markets mostly stuck in a trading range but is great to hedge if you have an import/export related business.