The Difference Between Trading Forex and Trading Stocks: A Comparison

Filed under: Learn Forex Trading |

Today, I would like to talk about the differences between trading the foreign exchange markets and trading the stock markets. One might think that if you can trade one then you can naturally trade the other. But the different markets require very different trading methodologies, and there are a number of good reasons why this is so.

 

Figure 1.

Figure 1.

The first and main difference is that the forex market is open 24 hours per day, but the stock market generally follows a 9-5 (or there about) format, closing overnight and then reopening again in the morning. If you take a look at Figure 1, you will see a forex chart for the GBP/USD pair (the pair for the British pound and the US dollar). You will notice that this chart has great continuity, with the close of each candle lining up with the open of the next. There are very few market gaps on a daily forex chart, and, in fact, the only time you will see a gap on a forex chart is between the close of Friday’s session and the open of Monday’s session (which is the only time that the market closes except for certain holidays). However, Figure 2 shows a chart for the FTSE100 and there is a noticeable difference. There are lots of gaps in this chart, and the close of one session rarely lines up with the open of another. This calls for a different set of strategies for trading this market, as gaps often provide strong areas of support/resistance.

 

Figure 2.

Figure 2.

Another factor to consider is that the forex market has much more liquidity. Liquidity is never a problem with getting forex trades matched, but if you trade some of the smaller cap stocks outside of the FTSE100, then you might have issues with selling a stock once you have bought it. Considering all of this, I prefer to exclusively trade the forex markets – and tend to stay away from the stock markets these days. However that, ultimately, is your call.

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