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A common debate amongst traders is which is better to trade: forex or stocks?

There are lots of factors to consider when answering this question including volume, liquidity, choice, commission and more. Ultimately there are quite different dynamics to both and much depends on your trading style. We will look at the arguments for both forex and stocks and give you our verdict at the end.

 

Forex vs Stock Trading – The Basics

There are a vast array of instruments for traders to get involved with these days from commodities to cryptocurrency, indices and much more besides. Two of the most popular and heavily traded however remain the foreign exchange (forex) markets and individual stocks.

In terms of forex trading, currencies are traded in pairs and are normally grouped in the following way:

  • The “major” pairs like EUR/USD, GBP/USD, and EUR/JPY;
  • The “minor” FX pairs like GBP/JPY, and CAD/CHF;
  • “Australasian” pairs involving the Australian and New Zealand dollars against various currencies,
  • And “exotic” pairs of more unusual currencies such as the Mexican Peso, Turkish Lira and the Polish Zloty.

In terms of stock trading, most brokers these days offer clients the chance to trade the “big boys” like Apple, Amazon, Facebook, Tesla and Netflix. Beyond that there is quite a lot of variation between brokers in terms of how many stocks they offer trading on.

Most brokers offer a selection of companies from the big stock markets in the USA, the UK, Germany, France and China. Some brokers like IG Index offer the chance to trade thousands of stocks, providing a huge choice to its clients.

So in essence traders are spoiled for choice these days in terms of what they want to trade and many like to get involved across a range of instruments. When it comes to stocks and forex, which is best though? Do either of them have clear advantages over the other? Let’s dive in below.

 

The Case For Forex – A Big Market For Big Players

On the face of it forex carries some distinct advantages for traders over stocks. Most of these advantages stem from forex’s sheer scale and what that means for trading it. It’s a big market with major involvement from big players like banks, hedge funds and financial institutions.

Specifically, the main advantages of forex are as follows:-

Volume

The forex market is vastly bigger than the stock market in terms of volume, with over $5 trillion traded on it daily versus around $200 biilion per day traded on stocks on all the world’s stock markets put together. That much greater volume tends to translate into a higher chance of having your order matched at the price you request and in a timely fashion.

The other advantage of the forex market’s scale is that it makes it more difficult for any single entity or group to influence the market. Where as stock prices can be influenced by a single fund buying or selling a big stake in a company, it would be a lot less likely for a single fund or private bank to have a significant influence on a major currency pair.

Liquidity and Spreads

Greater volume also means greater liquidity, which is good news for traders and it normally means tighter spreads. Most of the major forex pairs are available with very tight spreads of just one pip – or less sometimes – at the top brokers. As a percentage, that means traders are paying less of a fee to their broker per transaction and this can really add up over time.

For example, let’s say you were trading the EUR/USD pair. If you were trading at $1 per pip and looking to make $100 from a buy trade at 11121.9 as below:

The spread is the difference between the buy price and the sell price and is how the broker makes their money. Here the spread is 0.9 pips, indicated by the “0.9” between the buy and sell prices.

So with a profit target 100 pips away at 11221.9 and with the spread at 0.9 pips, you are in effect paying less than 1% to open the trade – 0.9% (or $0.09) to be precise.

Compare this to a trade on stocks and the spread will normally be quite a bit higher. For example, here is a trade on Twitter (during market hours):

As you can see, the spread here between the sell price and buy price is 7 pips rather than 0.9 pips for the EUR/USD trade above.

On other stocks like Apple and Facebook you often see spreads of 3-6 pips. On lesser known companies on smaller stock markets the spread can be significantly higher.

Either way, the spread on the major forex pairs is normally lower than on stocks, whatever market they are on. These differences in the spread – even small ones – can really add up over time.

Commission

In addition to having tight spreads, with forex trading you also don’t normally have to pay your broker any commission, where as you do if you trading stocks – if using CFDs rather than spread betting that is.

For example with CFDs many brokers charge a commission on both opening and closing a trade. This could be 0.10% or more and a minimum of $10, meaning you could pay $20 or more per trade. These charges can really eat into your trading profits – or add to your losses.

These extra costs of trading stocks aren’t there with forex – a distinct advantage to the latter.

24 Hour Trading

Another bonus of forex trading is that forex markets are available to trade 24 hours a day, compared to stock markets which are only open for around 8 hours per day. This is due to forex being an OTC (over the counter) market conducted via banks (the interbank market) rather than through a traditional exchange like the stock exchange. So it is not restricted by normal trading hours which apply to stock markets.

That means you have more opportunity to see your forex trades reach a successful conclusion rather than have the market close on you and to have to wait until the next day. Whilst there are some stocks that trade out of hours after the stock market has closed, these are restricted to a few of the very biggest companies like Apple and Amazon and the spread is usually bigger out of hours.

Both forex and stock markets are only available five days per week though, giving people the weekend to recuperate and get ready for the next week’s trading.

 

Range of Values

One of the key differences between stocks and forex is the range of values they tend to move over. For example, major forex pairs like the EUR/USD and GBP/USD haven’t tended to have a great deal of variation over the years in their maximum and minimum values, relative to some major stocks.

Over the last 50 years for instance, the pound has ranged from a high of around $2.62 back in 1972 down to a low of around $1.06 in 1985, according to data from macrotrends.net.

The Euro has had an even narrower range against the dollar since its inception, ranging from around 0.82 dollars in its early days up to a high of around 1.58 dollars during the financial crash of 2008, according to data from tradingeconomics.com.

Compare that to some stocks which have had massive price movements. Take a stock like Tesla for example which has had a very wide price range – and some might say a “colorful” existence – with its price fluctuating from $185 in May 2019 all the way up to $917 less than a year later in February 2020 – and hitting many points in between.

Tesla Inc. price chart from IG Index

There are advantages and disadvantages of this of course and much depends on an individual’s trading style, but the potential losses and gains are greater with a stock like Tesla that gained 400%, dropped 50% and then doubled again all in the space of less than a year, versus currencies which only fluctuated 10% – 20% over the same period.

Certainly the potential losses are greater with stocks, so if you are risk averse then you may find the smaller price ranges typically seen in forex compared to some stocks to be an advantage.

Tools to Trade With

These days there are a wide variety of tools to help traders in both stocks and forex, but it might be fair to say the more sophisticated tools are in the realm of forex. First and foremost is the trading platform MT4, which is an advanced tool for running forex robots, signals, charting and more.

Then there are various indicators, forex signal services (see for example the excellent Andy W’s Forex Signals), managed accounts and other tools to assist individuals with their forex trading.

At the same time of course stock traders have other tools on their side such as stock tips like the outstanding Beat the Market Analyzer and the whole separate sector of options trading, but in our experience there are a greater variety of tools available for forex traders.

 

Leverage

Leverage is a controversial topic and many people disagree over whether having more leverage available is a good or bad thing for traders. Many traders misunderstand leverage, become overexposed and suffer bad losses as a result, so having higher leverage available is not necessarily positive.

Whatever your views on leverage are however, it is worth recognizing that forex tends to have higher leverage available on it than stocks, with brokers in Europe operating under ESMA rules typically offering 30:1 leverage on major FX pairs compared to leverage of just 5:1 on individual equities (stocks and shares).

 

The Case for Stock Trading – Keeping the Focus

So there are some clear advantages to trading forex over stocks, but what about the other way round – are there any advantages of stocks over forex?

Well fortunately yes, there are a few. Let’s have a look at them below:

One Instrument to Consider Rather than Two

A significant advantage of trading stocks is that you only have to consider one instrument – the company you are trading – rather than two in the case of forex, where currencies are traded in pairs.

In forex, if you are trading the pound, you don’t just trade it in isolation, but against another currency like the US dollar, Euro or Swiss Franc. Therefore you don’t just have to consider news and economic data on one currency, but in fact two.

If you were trading the GBP/USD pair for example, you might be focused on the pound and content that it was likely to remain stable with no major news due, but if there was big news on the dollar it could have a significant affect on the currency pair.

With a stock by contrast, it is just valued in and of itself; you are not trading it against another stock. From this point of view it makes stocks simpler to trade than forex.

Less News to Worry About

That leads us onto another aspect of stock trading that holds advantages over forex trading. With forex, there is not just the fact that you are trading two instruments against each other rather than just one. You also have a wide range of factors that could affect the price of the currencies in question: economic growth, interest rates, inflation, retail sales, unemployment, political developments, the balance of trade, business and consumer sentiment surveys, industrial production and more.

With stocks it tends to be simpler with just their earnings and news releases affecting a stock price in normal time, plus of course the general movement of the market.

So if you select a stock to focus on, there is less news you normally need to be constantly on the lookout for, in contrast to currencies where there can be two or three news releases per week, per currency, which is a lot to keep on top of.

Wider Choice

Another benefit of trading stocks is the wide choice you have of companies to trade. As discussed above, some brokers offer thousands of stocks to choose from, compared to at most a few dozen forex pairs that are available to trade.

This gives traders the opportunity to select stocks they want to focus on from a very broad choice or to tailor their strategies to a certain sector or group of stocks. Traders often look at stock markets around the world for their favorite stocks to trade.

Possibility of Bigger GainsĀ 

As discussed above, stocks usually have a wider range of price movements than currency pairs. This can be both a disadvantage as well as an advantage.

However, for those who went long on stocks like Amazon, Netflix, Shopify and Tesla in the 2010 to 2020 period, there were outsize gains of potentially hundreds – or even thousands – of percent. Those sort of massive gains just aren’t available on forex in percentage terms so this is a significant advantage of stocks, for people looking at medium- to long term- trading at least.

 

Using Volume as an Indicator

Another advantage of stocks is that volume can be used as an indicator of direction or sentiment. A huge spike in volume on a stock can indicate strong sentiment in one direction and is used by lots of stock traders in their trading. There are also director deals (those inside the company buying or selling stock) which is another indicator used by some traders to infer either positive or negative sentiment about the company.

However, volume is not a reliable indicator in forex because there is no central exchange like a stock market where all transactions are recorded. There are obviously also no “director deals” as no company owns the currency. So forex traders are missing out on a major factor used in stock trading.

 

Weighing It All Up – Forex vs Stock Trading

So there you have it – the case for forex trading and the case for stock trading. It’s tough to say which is better, much depends on your trading style.

If you are doing short-term trading, scalping and the like then forex trading would seem to hold the edge due to low spreads, no commission, greater volume and 24 hour trading.

If you are doing longer term trading however, then stock trading holds out the prospect of larger gains due to the outsize moves in some stocks compared to the smaller relative moves usually seen in major FX pairs.

Of course, some traders mix and match doing a bit of both as opportunities present themselves, which if you are sharp enough to do then allows you to benefit from the advantages of both types of trading.

If you are doing either stock or forex trading – or a bit of both – we recommend you check out our list of Winning Trading Systems which have all passed a live trial here on the site and made a healthy profit.

 

 

The contents of this website are intended for educational and information purposes only and do not constitute any form of advice or recommendation and are not intended to be relied upon by you in making (or refraining to make) any specific investment or other decisions. Appropriate expert independent advice should be obtained before making any such decision. We cannot and do not offer individual investment advice.

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