Every so often, we hear the random person state that all markets are the same and if you can trade stocks, then trading Forex, options, or futures, and commodities isn’t that much different…so go ahead and dive in, you’ll be just fine.
Not Like the Other
Unfortunately, that mindset may get you into trouble. Each market has its own risks, personality, philosophy and methodology. Meaning, if you were to approach each market with the same (fixed) mindset, you would find out very quickly that they are not the same. Of course, overarching themes exist across trading all markets such as; risk, psychology, technical trading, news, charting, and of course opening and closing positions.
Keeping it Real
This blog won’t discuss every detail of each market otherwise it would be like other blogs; long and somewhat boring, so we’ll try to shed just enough light on what makes each market different from Forex. We’ll cover:
Forex
Stocks
Futures
Options
Commodities
Why we think FOREX Rules
The foreign currency spot market has only been accessible to the public since the mid 90s. This makes it a relatively new market compared to stocks, futures, options and other markets with considerably more longevity. Before Forex oversight was a “thing”, trading Forex was kind similar to the Wild West. Outrageous leverage, grossly under capitalized brokers who could (and would) disappear in the night with customer funds and absolutely no legal recourse, because regulatory oversight was virtually nonexistent. It happened to me…twice.
Simply stated, the FOReign EXchange market, also known as FOREX (or 4X) boils down to buying one currency while selling another at the same time – or selling one, while buying another. The concept is pretty straight forward. If you’re long on one, you’re hoping that it will get stronger than the other. If you’re short, well then, you’re hoping the other currency will be stronger. The mechanics are simple and to the point.
Positive Things
One of the biggest positive draws to this market is that you can get a lot, for a little (leverage). The beautiful thing about the Forex market is that you can make decisions on a specific amount of pairs each day, very quickly. Or depending on your style of trading, you can open and close positions 24 hours a day, Sunday through Friday. Other markets do not have that market availability. The sheer size and volume of the Forex market means that your positions are filled almost immediately. Other markets may not enjoy that distinction because slippage, volume and available price can hamper your ability to get in when you want. Oversight now, means that you can trade through brokers who are held to an exceptionally high standard. We talk about this on our Broker page HERE.
Stock Trading – Owning a Little
When you own stock, you are taking ownership of a very, very small part of that particular company. If you buy enough shares of a stock, you could effectively own a majority of that company. The biggest downside to trading stocks are the sheer number of available choices…tens of thousands to choose from across various submarkets. Other conditions which some may find limiting include; lack of leverage, trader sentiment, fundamental news, and the overwhelming amount of information available for consumption.
Futures…Always a Day Away
Futures are what is known as a derivative trading instrument, meaning their value is based on the value of another asset known as the “underlying” asset. Similar to Forex, positions are traded on margin, which employ leverage, meaning you can get more, for a little. Futures are highly speculative and abstract forces such as economics, weather, supply chain, and other large scale systems need consideration when deciding on opening positions.
Like other “derivative” investments, futures are traded through contracts. And as the name suggests, contract price is determined by an estimated future value of the underlying asset. Unlike Forex, futures are normally traded on organized exchanges, executed at an exchange and finalized through a regulated clearinghouse.
Futures first evolved from trading in the commodities markets (such as corn, wheat, oil, etc.) in the 19th century, when farmers sought to guarantee a future sale price for their goods. One party in the contract agrees to buy a given amount of an asset and take delivery of it on a pre-defined date, while the other party agrees to sell it on that date at the agreed-upon price.
Options – Decaying Asset
Options trading gives the trader the right, but not the obligation, of buying or selling options on large amounts of stock, futures and other securities which you hope will either go up or down in price over a certain period of time. It can be used to hedge against risk; for example, if you buy stock, you can purchase a call option in the event the stock price goes down to protect your position.
It has its own language including strike prices, puts, calls, in the money, out of the money, and the dreaded acceptance of knowing it is a decaying asset – meaning that if your “strike price” is not met, your options expire worthless and the premium you paid is gone.
Think of it as buying auto insurance. If nothing happens, the premium you paid for the policy is not refunded or carried past a certain date…but the policy expires. There can also be delays in opening positions because you are essentially guessing at what price your order may get filled – and if there is enough liquidity at that price. And, let’s not forget that you must pay a brokerage firm a commission on each of your trades, whereas the Forex interbank market matches buyers with sellers in an instant for very small spreads between the buy and sell price.
Commodities, the Uncommon Securities
Commodities are typically sorted into four categories broad categories; metal, energy, livestock and meat, and agricultural. Examples of each category include gold, oil, hogs, and wheat.
Commodities are known as risky investment propositions because their supply and demand market can be impacted by uncertainties that are difficult or impossible to predict. These include such things as unusual and difficult to forecast weather patterns, epidemics, and disasters both created by humans and natural occurrence.
The Bottom Line
Obviously, the different markets we have trading access can fulfill every type of desire for the individual. Our underlying question is; why make it difficult for yourself? Forex trading is straightforward and without many of the complex concepts. We even make it easy for you in our advanced course. Each step of the trading process is outlined in an easy-to-understand format. No guessing necessary. And of course, the biggest advantage is how you can ignore fundamental analysis almost completely, whereas in other markets you just can’t.
More to Come
There’s a lot more to come. If you haven’t signed up on our contacts page or subscribed to the YouTube channel, please consider doing so to receive notifications as we continue to publish helpful, relevant, and informative Forex related material to support your quest to becoming a better trader.
Advanced Course
To learn more about trading Forex, consider taking our advanced course. Click HERE for more information.
You can do this…be RELENTLESS.
BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments. It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.