March 23, 2011
The Major Differences Between Forex Trading And Share Trading
A lot of people develop an interest in forex trading after failing to make consistent profits from share trading. However the trouble is that having a background in stocks can encourage you to adopt similar strategies when looking for long term forex trading strategies.
The reality is that currencies and stocks are completely different. In many ways it is a lot easier to trade stocks because if you pick solid companies that have long records of both earnings and dividend growth, your task becomes relatively easy.
All you have to do is buy on any weakness, for example when the RSI and stochastics are below 20 or 30, or when the wider market has fallen and dragged the share price lower, and wait for the long term upward price trend to resume. You don't even need to get your timing spot on in a lot of cases because the long term trend will often put you into profit at some stage.
Another benefit of stock trading is that you have the advantage of being able to look into the future to some extent by taking a good look at the analyst reports of various different companies. So if you look at a site such as Digital Look, for example, which is a site I like to use a lot, you can see forecasts for the next 2-3 years, which will help you a great deal. You will have a good idea of the future revenues, earnings and dividend yields, and can therefore compare them to the figures from the current year and previous years to determine whether it is good value or not.
With forex trading you simply do not have this luxury. Unfortunately there is no long term upward trend for the various different currency pairs, and you simply cannot predict where any particular pair will be trading in the next 2-3 years, or even the next 2-3 weeks or months.
You can try and become an expert in fundamental analysis and study the economies of all of the major countries in order to try and see which currencies are likely to strengthen and which ones are likely to under-perform, so you can take a long term position on the relevant currency pairs.
However this is extremely difficult to do in reality. You only have to look at the predictions of many of the so-called expert economists on the likes of CNBC and Bloomberg, to see how often they get it wrong.
So the point I want to make is that there is a world of difference between stock trading and forex trading. In my opinion long term investing is a lot easier because you often have the long term trend on your side if you pick really solid growth companies, but there is still money to be made from forex trading. You just need to come at it from a completely different angle.