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Forex_Trading_And_The_Stock_Market_-_Similarities_And_Differences

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					Forex Trading And The Stock Market - Similarities And Differences

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624

Summary:
Most people get their introduction to financial trading through the stock
market. After all, it is the oldest and largest financial market in the
world, right? Wrong! The forex trades over $2 trillion (with a "T") a
day, and has been around as long as money itself . What's more, the forex
is even easier for individuals to participate in than the stock market-
and best of all, there are no commissions on forex trades!

That is one difference. But there are also plenty of simi...


Keywords:
forex, foreign exchange, currency trading, forex trading, online currency
trading, online forex


Article Body:
Most people get their introduction to financial trading through the stock
market. After all, it is the oldest and largest financial market in the
world, right? Wrong! The forex trades over $2 trillion (with a "T") a
day, and has been around as long as money itself . What's more, the forex
is even easier for individuals to participate in than the stock market-
and best of all, there are no commissions on forex trades!

That is one difference. But there are also plenty of similarities. Since
most people have a relatively strong understanding of the stock market,
and many may be considering a move from the stock market to the forex,
this article will explore the differences and similarities between the
two financial markets.

Differences

As noted above, there are no commissions on forex trades. This is because
everything is done electronically. In fact, there is no physical place
known as "the forex" -- it exists entirely in cyberspace. That makes for
much lower overhead, hence the "free trades" (see similarities for why
trades aren't exactly free), and also allows for a twenty-four-hours a
day trading platform, five-and-a-half days a week.

Secondly, while many stock-market investors use margin, most don't. In
the forex, everyone uses margin -- and to a much larger degree than
anyone uses it in the stock market. In the stock market, margin is capped
at 50%. This means that if you have $5,000 in your account, the maximum
value of stock you can purchase is $10,000. But in the forex, typical
margin ratios are 100:1, meaning you can control $100,000 of worth of
currency with just $1,000 in your account! This is one of the major
appeals of the forex.
Thirdly, while there are 13,000+ stocks for stock-market investors to
follow (and even more mutual funds, ETFs, etc.), there are essentially
eight major currencies (and only seven currency pairs) for forex traders
to follow.

Similarities

Well, forex trades aren't exactly "free." Just like in the stock market,
there is a bid/ask spread. What this means it that the market maker will
pay you less for a currency than the price for which he is willing to
sell it to you. For example, you may be able to buy $1 in U.S. currency
for $1.0905 in Canadian money, but when you want to turn around and buy
back Canadian dollars, you will have to pay more than one U.S. dollar to
get back your 1.0905 Canadian dollars.

Perhaps the biggest similarity between the stock market and the forex is
the use of technical analysis -- also known as "chartology." Technical
analysis principles hold up no matter what asset is being traded, so if
you've become a master candlestick-reading stock trader, you can easily
apply your talents to the forex.

Finally, when placing a trade, many of the same options are available in
the forex as in the stock market. Limit orders -- which set the maximum
price you're willing to pay or the minimum price you're willing to
receive -- can be used in the forex just as with stocks, as can stop
losses.

In Conclusion...

There are a lot of similarities between the stock market and the forex,
and some experience trading stocks is a good thing to have under your
belt. But far superior is experience actually trading currencies, and
this is not a Catch-22. You can trade currencies before you really join
the forex by opening a forex practice account. Most forex brokers offer
these accounts, free of charge, which let you get your feet wet without
the risk of getting soaked. Learn all you can about the forex, try out
your strategies in a practice account, and in little time at all, you'll
be ready to swim with the big fish in the biggest pond in all of finance
-- the forex!

				
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posted:3/2/2010
language:English
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