Forex or stocks?
One question I often hear being asked by wanna be traders is which is the best market to trade, Forex or stocks? Unsurprisingly, the answer given more often than not depends upon who you ask. If you ask a Forex broker this question, then no doubt you will be told that the FX market is the biggest and most liquid market in the world and is therefore the best. And of course, if you ask a broker that doesn't deal in currencies this question then you're likely to hear 101 reasons why the Forex market is best avoided.
So which market is actually the best to trade? Well, people will have to decide that for themselves. It's true that the Forex market doesn't have a directional bias; it is without a doubt the largest and most liquid market in the world, it is open 24/5, it has no central exchange etc... But do those characteristics actually help small traders? Personally I find that fairly doubtful, but each trader will have to decide for them self how much benefit things like massive liquidity, 24 hour opening times and no central exchange will actually bring them. I just can't see very much benefit in these things at all for the average non-institutional trader, the stock market is liquid enough for most traders, looking at numbers 24 hours a day isn't healthy, and I would actually say the market would be better with a central exchange and an official price.
But traders, I believe, will not get their individual answer to the question which is better, trading Forex or trading stocks by comparing the market sizes and liquidity levels, or by comparing opening hours. The question, I believe, can be answered by honestly asking ones self what kind of trader do I want to be and by fully understanding the implications of each kind of trading.
One of the most important things that newbie traders need to learn is that there are different types of markets and that different markets need to be approached with different trading strategies. The Forex market produces some of the longest lasting and cleanest trends and is therefore best traded with a long-term trend following strategy; the stock market however does not have this characteristic. Stock market indices usually do have a directional bias (i.e. it's either a bull market or a bear market) but they also tend to 'zigzag' producing a series of mini highs and lows as the speculators driving the stock market repeatedly target support and resistance levels.
If you would like to trade infrequently, using some kind of long-term trend following strategy then Forex is probably for you, at least it is probably more likely to be suitable for you than trading stock market indices is anyway.
Long-term trend following systems are, in my opinion, the easiest systems to mechanise and develop, but the most difficult systems to trade psychologically. I actually believe that most people's brains are hardwired to trade in exactly the opposite way that a mechanical trend following system would dictate that they should. For example, most people aim to buy value, that is, they aim to buy low and sell high. This makes perfect sense in most business models, but it is not right for trend trading – trend trading demands we do exactly the opposite, trend trading demands we buy when the price is making new highs and sell when the price is making new lows. Trend trading also involves holding trades for long periods of time (often many months) whilst most people are tempted to take profits when they have them. Everyone accepts that they can't win all the time and that losing trades are a part of trading, but even when they have accepted this they will still be left with the feeling that this particular trade they are in right now has to be one of the winners, so the temptation to take a winning trade off to soon for a small profit and hold a loser to long hoping it turns round is always there.
In short, to honestly answer the question of which is best Forex or stocks, one has to be honest with themselves about which kind of trading they strategy they would like to use. If they would like to use a long-term trend following strategy after being honest about how difficult this can be emotionally then the Forex market is probably better for them than trading stocks and stock market indices. If one isn't cut out for that emotionally, and I believe most people aren't, then trading stocks would probably be a better bet.
So which market is actually the best to trade? Well, people will have to decide that for themselves. It's true that the Forex market doesn't have a directional bias; it is without a doubt the largest and most liquid market in the world, it is open 24/5, it has no central exchange etc... But do those characteristics actually help small traders? Personally I find that fairly doubtful, but each trader will have to decide for them self how much benefit things like massive liquidity, 24 hour opening times and no central exchange will actually bring them. I just can't see very much benefit in these things at all for the average non-institutional trader, the stock market is liquid enough for most traders, looking at numbers 24 hours a day isn't healthy, and I would actually say the market would be better with a central exchange and an official price.
But traders, I believe, will not get their individual answer to the question which is better, trading Forex or trading stocks by comparing the market sizes and liquidity levels, or by comparing opening hours. The question, I believe, can be answered by honestly asking ones self what kind of trader do I want to be and by fully understanding the implications of each kind of trading.
One of the most important things that newbie traders need to learn is that there are different types of markets and that different markets need to be approached with different trading strategies. The Forex market produces some of the longest lasting and cleanest trends and is therefore best traded with a long-term trend following strategy; the stock market however does not have this characteristic. Stock market indices usually do have a directional bias (i.e. it's either a bull market or a bear market) but they also tend to 'zigzag' producing a series of mini highs and lows as the speculators driving the stock market repeatedly target support and resistance levels.
If you would like to trade infrequently, using some kind of long-term trend following strategy then Forex is probably for you, at least it is probably more likely to be suitable for you than trading stock market indices is anyway.
Long-term trend following systems are, in my opinion, the easiest systems to mechanise and develop, but the most difficult systems to trade psychologically. I actually believe that most people's brains are hardwired to trade in exactly the opposite way that a mechanical trend following system would dictate that they should. For example, most people aim to buy value, that is, they aim to buy low and sell high. This makes perfect sense in most business models, but it is not right for trend trading – trend trading demands we do exactly the opposite, trend trading demands we buy when the price is making new highs and sell when the price is making new lows. Trend trading also involves holding trades for long periods of time (often many months) whilst most people are tempted to take profits when they have them. Everyone accepts that they can't win all the time and that losing trades are a part of trading, but even when they have accepted this they will still be left with the feeling that this particular trade they are in right now has to be one of the winners, so the temptation to take a winning trade off to soon for a small profit and hold a loser to long hoping it turns round is always there.
In short, to honestly answer the question of which is best Forex or stocks, one has to be honest with themselves about which kind of trading they strategy they would like to use. If they would like to use a long-term trend following strategy after being honest about how difficult this can be emotionally then the Forex market is probably better for them than trading stocks and stock market indices. If one isn't cut out for that emotionally, and I believe most people aren't, then trading stocks would probably be a better bet.
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