Forex day trading, or FX trading, can be just as difficult and stressful as day trading stocks. As a matter of fact, they are similar in many ways. It’s really the same job, just different financial instrument. If you can do one, you can likely learn the other relatively easily. If you can do neither, maybe now’s the time to learn to day trade. Either way, there are some similarities and differences you should be aware of.
Similarities Between Stock and Forex Day Trading
- Price is king. It doesn’t matter what you’re trading, the most important piece of information is price. Past prices, current price, and where price has had difficulty breaking through (support and resistance) is all based on the same concepts whether Forex or otherwise. This includes any indicator that is based solely on price and time like moving averages.
- Liquidity makes for smooth transactions. Most people don’t realize that the Forex market is the largest on the planet by high orders of magnitude. Trillions of dollars flow through the Forex every day. This means you will never be stuck in trade, though the slippage can be intense when world news breaks (disasters and the like). Liquidity is important for day trading stocks as well; you want to be in and out exactly as you’d planned (give or takes a few pennies), and getting caught in an illiquid position at the wrong time can be devastating to a day trader.
- The charts. Back to the above point about indicators being the same, the charts and the technical analysis that goes into them all remains the same. All the basic principals are also the the same. As mentioned above, the support and resistance are the same. Elliot waves and the like are going to operate in the same manor. Even the mechanics of charting, and using your charts to trade will remain the same. Some trading platforms even allow the trading of both stocks and the FX.
Differences Between Stock and FX Trading
- Transparency is lost when trading on the Forex. Traders often rely on Level 1 and Level 2 information to make their trading decisions. Some really good traders can trade straight from the tape. The transparency offered by this type of information is basically lost on the FX. Some brokers claim to have their own version of this information, but it only displays the information for trades within that brokerage or a group of participating brokerage. This information isn’t required to be reported; the rules and regulations on the Forex are more lax. It’s an international market, and sometimes it’s difficult to enforce rules across so many borders.
- In addition to the transparency mentioned, volume indicators are also either not available, or no real indicator of anything important. Again, the information would only be valuable for your broker. Though each broker kind of operates as a market within a market, this still isn’t entirely accurate and actionable information. If someone asks “What’s the forex trading volume?” The answer is “A lot,” But no specific indicator will tell you exactly what is coming through for any given time period.
- Penny stocks don’t exist on the Forex, nor any variation therein. Sometimes people get caught up in penny stocks because it seems like easy money, but they can be quite difficult to trade without extensive knowledge of that portion of the stock market. This leads back to the point about liquidity. Penny stocks are often low volume, and illiquid. No such potential peril exists on the FX; all forex currency pairs are overflowing with liquidity. You will never be stuck in a position that you don’t want to be in.
- Fewer trading options. This can be viewed as a positive or negative. It can be considered positive because there are only a limited amount of currency pairs that you can possibly have to keep tabs on. Many forex day traders specialize in only one pair. The negative side of this is that if nothing is causing your pair, or any of the few choices on the Forex to move, then you’re sitting on y our hands. This happens on the stock market at times as well, but really, if you look hard enough, there’s always something moving in the stock market; there’s always something to trade.
- A forex day trader is able to hold positions overnight. The idea behind not holding stocks overnight is that anything can happen over night, and given the large amount of leverage that stock day traders employ, a large overnight move can be account crushing. The forex, on the other hand, is a 24 hour market. The forex trading hours are from Sunday at 5pm EST to Friday at 5pm EST. And while large moves against a fx trader can happen while they sleep, they usually sleep with alarms set at certain prices, or automatic orders set up in case a trade goes against them.
There are, of course, many more similarities and differences between forex day trading, and stocks. If you’re looking to get your trading fix when the stock market is closed, then fx trading might be for you. You might also be interested because pattern day trading rules don’t exist on the Forex (another big difference), and many forex brokers require only a small initial deposit (sometimes as low as $500), and they allow you to leverage up to 1:100. This might be a good way to get into day trading, but it can also be very dangerous, so approach the Forex analytically and stategically, and not with the get rich quick mindset, which will set you up for failure and quickly end your forex day trading career.
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