Experienced stock traders are always on the lookout for new opportunities, and as a new era of volatility enters our global markets, the appeal of the foreign exchange market continues to grow for anyone that has yet to test the waters of the currency world.
In this two-part series, this first article will focus on the similarities of stock and currency trading, while the second will delve into the subtle differences that must be addressed correctly when trading for profit is your primary objective.
Even the lowliest individual trader, supported by advances in technology, modern trading software, and a creative broker community, can access the forex market today. As long as you have an Internet connection, you can trade currency pairs nearly six days a week from your home, the office, or the Starbucks down the street. With over $4 trillion traded daily, it is our largest market, and speculative activity accounts for over 80% of market activity.
Success factors for both mediums are the same; knowledge, experience, and emotional control are the "Big 3" to keep in mind at all times. Preparation and planning are key to getting started, and in the process, you will note these obvious similarities:
Trading Platform: Brokers are still a necessity, and may come with either their proprietary trading software or allow use of popular trading platforms, like MetaTrader4. Your trading style will dictate the type of broker to choose. A subset will work well for day-traders looking to "scalp" a few basis points from a high volume of trades. Others may discourage "scalping" with pricing structures that favor a position trader. It is best to go with a domestic broker, since dealing with offshore entities may cause problems down the line.
Fundamental Analysis: The "Fundamentals" move both markets. With stocks, you must study companies, but with currencies, you must understand the interplay between global economic data and each country's domestic economy. The ability to access and assimilate a mountain of daily data releases is beyond any single human's capabilities. Large banks and hedge funds have large staffs and massive computer models that dictate their every move in the market. Your time can be better spent searching for acceptable trending patterns, and then relying on technical methods to guide your way.
Technical Analysis: Currencies fluctuate in wave-like patterns, but the nature of forex volatility, while not as great on a percentage basis as with stocks, is that it tends to change directions radically and more frequently than with stocks. Your best "tool" for success is technical analysis. Analytical skill sets are directly transferable, but you must adapt to a new level of sensitivity.
Practice Regimen: With stocks, there are various paper-trading or automated systems that can be used. In the forex world, a "free" demo account is an "add-on" offered by most every broker that will allow you to trade "virtual" cash at real time rates. A detailed trading plan is a necessity, and these demo systems allow you to gain the confidence and consistency required to succeed.
Trading Strategy: Selecting optimum entry and exit points, using risk management tools to minimize loss values, and applying sound money management principles are the disciplines required in forex trading. You still want to buy on the dips and sell on the peaks, but keeping losses at low levels while letting winners run is still your primary objective.
As for the differences between these two investment vehicles, the subsequent part of this series will speak to those nuances that must be accommodated on your road to success.
Before venturing into Forex trading, the investor would be well advised to find a teacher or mentor. This mentor is expected to firstly explain the theory behind Forex trading; then guide the investor through sample trades using pen and paper; and finally guide the investor through Forex trading in real time using real money. Further, the investor would be able to draw upon the mentor's experiences and avoid the common errors he may have otherwise committed.
Forex trading in itself is safe if the investors were to be realistic in their expectations and have done their initial preparation. The investors would realize that it is hard work and can provide a profession or a source of income to them. However, the investors must be on their guard against scamsters like in any other business.