The stock market is where most people first learn how to trade money. After all, it is the world's oldest and biggest financial market. Wrong! The foreign exchange market trades more than $2 trillion (with a "T") every day. It has been around since money was invented. Even better, there are no commissions on forex trades, which makes it even easier for individuals to get involved than the stock market.
One difference is that. But there are also a lot of things that are the same. Since most people have a good understanding of the stock market and many may be thinking about switching from the stock market to the forex, this article will look at how the two financial markets are different and how they are the same.
Differences
As was already said, there are no commissions when trading forex. Everything is done electronically, so this is the case. In fact, there is no place called "the forex" in the real world. It only exists in cyberspace. This means that there is much less overhead, which is why there are "free trades" (see similarities for why trades aren't really free) and also makes it possible to trade 24 hours a day, five and a half days a week.
Second, many investors in the stock market use margin, but most don't. In the forex market, everyone uses margin, and they do so much more than in the stock market. In the stock market, the most you can lose on margin is 50%. This means that if you have $5,000 in your account, you can buy up to $10,000 worth of stock. But in forex, margin ratios are usually 100:1, which means that with just $1,000 in your account, you can control $100,000 worth of currency. This is one of the most interesting things about the forex.
Third, while stock market investors can follow more than 13,000 stocks and even more mutual funds, ETFs, etc., forex traders can only follow eight major currencies and seven currency pairs.
Similarities
Well, trading in foreign currency isn't exactly "free." There is a bid/ask spread, just like in the stock market. This means that the market maker will give you less money for a currency than he is willing to sell it to you for. For example, you might be able to buy $1 in U.S. currency for $1.0905 in Canadian money, but if you want to buy back Canadian dollars, you will have to pay more than $1 in U.S. currency for your 1.0905 Canadian dollars.
Technical analysis, which is also called "chartology," is used in both the stock market and the forex. This is one of the most similar things about the two markets. No matter what asset is being traded, the rules of technical analysis stay the same. If you are an expert at reading candlestick charts for stocks, you can easily apply your skills to the forex.
Lastly, when making a trade on the forex, you have many of the same options as you do on the stock market. Limit orders, in which you set the highest price you're willing to pay or the lowest price you're willing to accept, and stop losses, in which you cut your losses, can be used in the forex just as they are in the stock market.
In the end,...
There are a lot of similarities between the stock market and the foreign exchange market, and it's a good idea to have some experience trading stocks. But actually trading currencies is much better, and this is not a Catch-22. If you open a forex practise account, you can trade currencies before you join the forex for real. Most forex brokers offer these accounts for free, so you can test the water without having to worry about getting wet. Learn as much as you can about the forex and try out your strategies in a practise account. In no time, you'll be ready to swim with the big fish in the biggest pond in all of finance: the forex.
