Some traders arrive at forex after first trading stocks, or perhaps investing in bonds. Others discover forex trading before they’ve experienced any other kind of investment. In any case, forex offers plenty of advantages over trading stocks and other sorts of investments.
Most independent traders begin their careers by reading basic books about personal finance, plus various “how-to” books about specific trading niches and money-management techniques.
Some traders are fortunate enough to have professional mentoring or an exceptional “prop trading” opportunity. Yet, most traders begin on a small scale and with appropriate testing and “paper trading” before committing real money.
For those whose first trading experience is with stocks, forex offers plenty of benefits. Let’s have a look at the advantages of forex trading when compared with stock trading.
Comparing forex against stock trading
Most financial authors say that “conservative” stock investments should yield an average of around 5% annually, and “risky” investments in a diversified portfolio of stocks and mutual funds should yield somewhat higher. Of course, traditional wisdom says that the stock market rises an average of about 10% per year, over time.
Buying equities can be highly profitable. Yet, success in stock markets usually requires fundamental or “insider” knowledge about a specific company. Savvy investors must know their favorite stocks well enough to spot a bargain, and likewise be aware when their favorite funds are undervalued.
Independent investors in the stock markets soon discover that their timing is usually one step behind the big players in the market. Large investment funds are staffed by professional analysts tasked with studying all fundamental and technical information available about a particular company.
So, it’s usually quite difficult for small traders to earn more than a few percentage points in annual gains with stocks.
Worse, since few stock-fund money managers ever consistently achieve more than 20% in annual gains, probably very few retail investors could do better. But, instead of accepting ho-hum returns in the stock markets, investors have turned to forex trading instead.
Forex is better than stock trading
Forex trading offers plenty of advantages over stock trading –
Superior liquidity. With more than $2 trillion in transactions each day, forex offers the best liquidity. Buy and sell orders are filled instantly, which means less “slippage” and better profits.
“Paper trading” forex offers an accurate test. Many traders begin by first “paper trading” or mock trading a demo account. However, trading stocks in a demo account is far different from real trading, because of the delayed order execution times and reduced liquidity in real stock markets. So, beginners may fail through flawed strategies.
In contrast, because of the lightning-quick executions and deep liquidity in forex markets, “paper trading” in a forex demo is generally an accurate simulation of real-world results.
24-7 trading. Forex trading platforms are open 24 hours per day, five-and-a-half days per week. On the other hand, stocks are often illiquid after daytime trading sessions close.
Forex can’t be controlled by large players. Banks and financial institutions, investment funds and high-net-worth individuals can all influence the movements of stock prices, whether up or down. Unfortunately, major stock market players generally scoop up most of the price gains during such rises, and leave independent stock traders with most of the losses during price drops.
In contrast, the enormous volume in foreign currencies traded each day means that nobody, including central banks and heavyweight investors, could manipulate the forex market.
Leverage. Although leverage in stock accounts is typically limited to a ratio of 2:1, forex offers as much as 200:1 leverage.
No restrictions on selling short. Stock markets enforce an “uptick rule” so that short-sales must be entered when a stock’s price is moving upward. This negates most profit-making opportunities. On the other hand, forex positions can be entered either long or short, without restrictions.
The psychological advantage of forex over stocks and other investments
Because of the foreign exchange market’s global liquidity, traders can achieve far greater returns by using expert advisors (EA) and mechanical forex trading systems, while avoiding stock trading.
The biggest advantage of trading forex instead of stocks is a psychological one – In a world dominated by large financial institutions, forex can level the playing field for small traders.
Independent stock traders are forced to compete against professional fund managers and institutional investors with superior resources for fundamental research. Forex is different because it lets the trader control of his or her own fate.
Superior leverage gives traders the opportunity to earn far more from successful forex trading than from stock trading. In sharp contrast to the typical single-digit yearly gains in stock-trading accounts, forex offers the potential for much larger returns.
Have you traded stocks as well as forex? If so, how would you compare them?