Stock Trading Skills Are Applicable in Forex Trading

By on October 30, 2011

Guest contribution provided by Forex Traders:

For stock traders looking to expand their horizons, the world of foreign exchange offers many possibilities for leveraging analytical skills that have already proven successful in other markets. Trading is all about speculation, and foreign currencies are the largest speculative market in the world. With over $4 trillion in daily volume and international trade less than 10% of that figure, speculators account for over 80% of the transactions in this market.

Retail fx trading has come a long way in the past decade. Once the private playground for major banks and financial institutions, the forex market, with the aid of technology and a creative broker community, has now become accessible by the individual trader at nearly any time or at any place that an Internet connection can be had. The market is extremely liquid, especially for major currency pairs involving the U.S. Dollar, keeping spreads thin and order executions in the nanosecond range. Newcomers to this genre will encounter familiar territory, but the subtle similarities also disguise equally subtle differences that must be addressed up front, before any real capital is put at risk.

The first issue is “value”. Shares of stock have a specific “intrinsic” value, based on the company’s past performance and prospects for the future. There is nothing intrinsic about currencies. Although a basic storehouse of cash may have purchasing power, the market value of a specific currency is “relative” to its conversion potential to another currency. Currencies come in pairs, and the conversion rate between them relates to the comparative economic health of the two countries involved. You do not invest in currencies, “per se”, but you do invest in a “position” that will always be “long” in one currency and “short” in the other. There are no restrictive short-selling rules in the world of forex. Companies can go bankrupt, but exchange rates for major currency pairs always move in cyclical patterns over time.

Fundamental information also moves the forex market, but in a more diverse manner. With stocks, you can focus on a company and the industry segment where it participates. With currencies, every bit of economic information about the countries of your chosen pair can influence prices. Data about the U.S. economy can also affect other non-related pairs depending on export/import ramifications. For this simple fact, currency movements often correlate strongly with the ups and downs of the U.S. stock market indexes.

Banks and hedge funds devote heavy resources to their proprietary models that calculate potential impacts of changes in the “fundamentals”. Since competing at this level is nearly impossible, the recommendation for forex traders is to focus on trends, be aware of key data release dates and times, and use Technical Analysis to your advantage. Leave Fundamental Analysis to the experts. Attempting to outguess the market is full of pitfalls that must be avoided if you wish to survive and trade another day.

Technical Analysis is your “weapon” of choice. Use indicators wisely to point to high percentage set-ups, but accept that more experience may be required. Some forex traders rely totally on “the Fibs”, using Fibonacci ratios to gauge support and resistance levels for possible market entries and exits. Invest the time in a “free” demo account to grow accustomed to the nuances that occur when currencies move quickly.

At the end of the day, trading strategies are similar, but the pace of change is greater as every piece of economic data is assimilated in real time. Keep losses to a minimum, let your winners run, and know that the trend is indeed your friend!

Disclaimer: Trading Forex involves a significant risk of loss. Always do your own due diligence prior to making an investment decision.

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