In this video we are going to compare the Forex and Stocks markets and point out some of the major differences. If you prefer a text format you can read the article here -
👉*Duration of the trades*
In spot forex (or just forex) you will find different styles of trading – from scalping (very short term trading that lasts from a few seconds to a few minutes/hours) to swing trading (a trading style where the investor tends to hold the position for significantly longer periods of time, aiming to ride the market cycles) or Investor Style Trading.
It is however a known fact, that forex attracts traders with its high volatility which no other market can provide (forex daily turnover on an average day is $5.3 trillion). Those are huge numbers and if you know how to take advantage of the situation, you may end up with nice chunk of profits.
A high volatility market along with leverage is a winning formula for the intraday traders who are looking to extract pips on daily basis. As opposed to stock market traders where the majority will be holding their positions for weeks/months maybe even years.
👉*Decentralized vs Centralized Markets*
The forex market is decentralized (over the counter) which means the big banks, hedge funds, institutions, brokerages etc., are trading directly between each other. There is no physical location of “the market”.
It all happens over the internet/phone. In such market structure the participants may look for ask/bid offers from different providers creating a habitat of competition which means lower fees but unfortunately not always a better quality.
Equities on the other hand are traded in Stock Exchanges such as the London Stock Exchange for example which is centralized. All transactions are routed to one central exchange and the offered quote is the only one available to the participants.
👉*Decentralized vs Centralized Market Structure Explained:*
Imagine that you go to Mall X where you want to grab a quick bite. There are 10 fast food boots and all of them are offering burgers. However the cost of the burgers vary at each stand. Some will offer bigger portions for less, others will rely on their brand and stick with a higher price even though the burger is smaller etc. This is the equivalent of the forex market structure.
Now imagine you go to Mall Y where there is only 1 place that offers burgers. No competition, no options. Take it or leave it.
👉*Market Hours*
Thanks to internet and technology anyone, anywhere in the world is able to trade. This is the beauty of this profession! Back to the subject of forex and stocks. Some might be disappointed from the stock market availability as every exchange has it working hours. If you live in a certain location where the hours don’t fit your preferences you might find yourself stuck in a tough situation.
The forex market on the other hand is open Monday through Friday or 24/5. Five days. twenty-four hours a day. This sounds a lot more tempting as in this case location doesn’t really matter. It matters to an extend where you want to check what are the active currencies during your hours of operation.
For example it doesn’t make a lot of sense to trade the EURGBP pair in the Asian session when very low volatility could be expected for this specific pair. JPY pairs would be a better fit for instance.
This is where the limitations end when it comes to forex, just choose your trading instruments wisely and you are good to go.
👉*Variety of instruments*
The more the better they say. Well I’m not sure this is the case when it comes to trading. You can pick from literally thousands of companies traded. If you have ever traded before, you can imagine how much hours of work that would take to scan them all.
I leave alone the fact that scanning them all is actually physically impossible, however even if you had a software which will tell you which ones are moving it would still be very difficult to follow up and decide what to trade.
In forex things are a bit different. Depending on your broker you might find +70 currency pairs in your watch list BUT you will not be trading more than 20/30 pairs maximum. The so called majors have the narrowest spreads and thus are the most traded pairs – usually. In reality scalping and intraday trading is almost impossible on exotic pairs and some of the crosses where the spreads are just not worth it.
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