With stock markets performing so poorly in recent years and therefore investors’ savings being substantially reduced, many people have decided to try their hand at forex trading. However although forex trading can potentially be very lucrative if you can develop a profitable system, it does differ greatly from stock market investing.
Firstly there is the obvious fact that in general forex trades are made over significantly shorter time frames. Whereas share investments can be held for weeks, months or years, forex trades are generally executed either within the same day or within no more than a few days or weeks. Indeed it doesn’t really make sense to hold on to long-term positions when trading currencies because you can incur extra costs if you hold onto positions overnight or roll over positions after their expire, for example.
Also if you are a traditional stock market investor, you will often be impressed by just how easy it is to enter and exit positions. Many people salivate at the prospect of entering and exiting positions within just a few minutes and racking up huge gains on a daily basis trading several positions a day, but the reality is that this is exceptionally difficult to do. Indeed many investors will start reverting to trading longer term positions after initially losing money from short-term trading.
Another noticeable difference is that forex trading is a much purer method of trading. You don’t have to worry about waking up one morning only to find your investment has halved due to a profits warning, for instance. Although there are a few economic data releases that move the markets, on the whole you can trade currencies 24 hours a day using nothing more than simple technical analysis.
Indeed another benefit of trading currencies is that you will generally find that they respond much better to technical analysis than shares do. There are many reasons why this is the case but the main one is possibly due to the fact that there are only a limited number of currency pairs available to trade, particularly if you stick to the majors. Therefore technical analysis works because many traders from all over the world see the exact same technical patterns forming and place their trades accordingly.
So overall there are some things you will need to learn if you are switching from stock market investing to currency trading but you should find that trading forex is substantially more exciting, and potentially more rewarding as well if you can develop your own profitable system.
