It is very common when you search for the advantages of forex trading to read tons of websites telling you why forex is so much better than stocks and why it represents a much juicier opportunity for profits with unprecedented leverage and limitless potential. People who write about this matter often tell you that forex trading is better because it is a “24 hour market” in which you can make profits despite being in a “bull or bear market” and although both of these things are true, they always fail to mention the most important differences between stock and forex trading and why stock trading is much more suited to “making people rick quick” than the forex market. On today’s post I will talk about why it is much harder to achieve large quick profits from forex – due to inherent limitations of the market – and why this is evidently not the case for stocks. After reading this article you’ll better understand the real differences – when investing and trading – that relate to your profitability when trading either forex or stocks.
There are some obvious differences between the forex and stock markets which we all know. The forex market is open 24/5, the stock market is not, the forex market allows you to use very high leverage (1:50-1:400) the stock market does not, the forex market allows you to day trade from 1 USD, the stock market does not, the forex market allows you to easily enter short positions, the stock market does not, etc. Evidently it seems that the forex market has much more potential for “large quick profits” but the real answer is that this is simply not the case.
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If you compare the number of rare “quick rich” cases which have generated fortunes due to what many would consider “simple luck” the cases in the stock market are quite common while the cases in forex trading are non-existent (at least I couldn’t find any). For example on the 1999 bull market fueled by the dot com bubble there are at least 3 or 4 well known examples of people who took a 30-100K capital and turned it into 5-10 millions dollars within a single year. During the past 20 years you can in fact find many examples of people who got rich this way trading stocks while in forex this is not the case.
What is the fundamental difference that makes the “get rich quick” phenomena so “common” in stocks and practically null in forex ? The answer is related to the way in which the markets develop and the assets they trade. In forex trading you are speculating about the appreciation of a country’s currency against another. Fluctuations of these values are usually very small and fixed and the profit you can extract from them is limited. For example if you had a 10K account and you had a 1:100 leverage and you used all your leverage to get into a position and the market went one thousand pips in your favor without giving you a margin call (10, 100K lots, 100 dollars per pip, 1000 pips) you would in the end have 110K. Now if the market went only 100 pips against you, you would get a margin call and lose all your capital. Take into account that predicting a 1000 pip swing within 100 pips is extremely difficult to do and you’ll understand that getting “huge returns” out of the forex market to get rich quick is quite difficult. If you wanted to take that 10K account to 1 million you would need to risk much more and the problem would become even bigger. Some people will argue that you can achieve these huge gains through daily compounding (for example a daily 5% gain) the problem is that such an approach doesn’t require “luck” but a true very big long term statistical edge (that lasts for at least a year) something that the market sadly does not allow.
Now with stocks this is very different since when you trade a stock (when you buy it) you only risk losing all your money if the stock goes to zero and you have unlimited upside potential. Since there are companies that can go from very low values to extremely high trading values in several years it becomes obvious that anyone who catches them when they are small with a large amount of money can truly become a millionaire much quicker than someone trading forex. If you buy a stock at 50 pennies and then the stock goes to 100 dollars in 2 years you have made in fact 200 times your initial investment, easily taking a 10K investment to 2 million dollars. Of course, this is tremendously hard to do and you are bound to lose all your money with a high probability but it has in fact been done, showing that this “profitable luck” is possible in stocks but quite impossible in forex due to the actual make up of the market.
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I have developed a view of the forex market within the past few years as a better investment vehicle than stocks. I can trade the forex market successfully using mechanical trading strategies and get an average compounded yearly profit higher than that of the stock market meaning that – in the long term – for me it is better to invest in forex and make returns from inefficiencies within currency pairs than to do the same with stocks. The forex market gives an opportunity to build robust investments with fewer capital and to remain calm under market crashes something which stock investors simply cannot do because it affects them directly. It is my belief that forex is a better long term investment than stocks from a yield and stability perspective.
However I have to admit that – from a get rich quick perspective – it doesn’t make any sense to trade forex as the potential rewards are limited and the potential risk is extremely high. Anyone trading this market without a true long term edge, attempting to use “get rich quick” systems like high leveraged Martingales or scalpers is sure to wipe their account clean in the medium term and in the short term their reward won’t be very significant since they will attempt to risk everything each time to achieve the 1K to one million USD dream. If a person wants to get rich quick and out of chance, then stocks would be the way to go, in stocks you can even do research of the companies and identify those that yield some potential meaning that you could effectively take the same risks as in forex with a much higher and potentially unlimited reward for an “all or nothing” bet.
To sum it up, the idea that forex is a better market to get a lot of riches quicker is a hollow and unfounded one. If this is your goal I would look into stocks where there are many documented cases of people who have done exactly this (gone from a few thousand to a few million) while if your goal was to grow your capital for long term profitability then forex might be a good opportunity with much better and stable long term rewards when compared to stock trading. I know this sounds like the total inverse of what people usually believe but if you follow my train of thought you will see that it actually makes a lot of sense ! :o)
If you would like to learn more about forex mechanical trading systems and how you to can design and build your own likely long term profitable systems please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to automated trading in general . I hope you enjoyed this article ! :o)
Daniel,
I’m trying to trade stocks at NYSE for diversification purposes. I have to admit that trading them is much harder. It is also important to mention that one has to maintain risk (using SL, stocks amount, trading several stocks, etc). Additionally, there could be stocks, having potential, but unavailable in the trading platform. There also are fundamentals, causing a sound stock to go in opposite direction. Also, entering/leaving position when trading stocks is more expensive than that of forex.
I agree that ‘catching’ a stock can provide a very nice return, but it is a real art, few people possess that feeling of the market.
To sum it up, I prefer to trade forex, using stocks as a secondary market.
Maxim
Hello Maxim,
Thank you for your comment :o) I do perfectly agree with what you say and that reinforces my point of view. Forex is a much better market – in my experience – to achieve long term profitability due to the fact that it is easier to exploit inefficiencies, trading costs are lower and minimum capital requirements are lower. However my point was not that trading stocks is in anyway “better” but that the potential for profits from “luck” is much higher in stock trading than in forex trading since “catching a stock” from pennies to hundreds can effectively make someone a millionaire over simple luck while doing the same thing in forex isn’t possible. My point was mainly that forex needs to be viewed as a market for long term investments since the chance of becoming “rich through luck” is almost none existent and anyone trading without a long term edge will eventually fail. I do not trade the stock market for long term investments due to the inherent larger costs and the vulnerability to “bubbles” that can cause pronounced periods of economic distress, forex is obviously my primordial and most important long term investment. Thanks again for your comment ! :o)
Best Regards,
Daniel
PS : An “art” is a representation of what is aesthetically beautiful, defining any financial skill as “art” is misleading. It is better to say simply that it is a hard skill to acquire that cannot be taught without personal experience.
Daniel-
I absolutely agree that stocks are a quicker and easier way to build wealth than Forex. That’s why I focus 90% of my money on stocks and maybe 10% on Forex. I find trends much easier to identify in stocks and they last longer than in Forex.
One of my favorite quotes is: “Stocks are easy, you buy them, and they go up. And if they don’t go up, don’t buy ’em!” – Will Rogers
But I think the real difference is that stocks are a Positive Sum Game while Forex is a Zero Sum Game. With stocks, wealth is literally being created out of nothing, and all you have to do is find the right stock at the right time. With Forex, your not winning unless someone else is loosing, not unlike Futures and Options which are also a zero sum game.
And my favorite 2 indicators in stocks are 1) A breakout to a new all time high and 2) Stock breaks $100 for the first time. Apply those 2 filters and the winners rise right to the top!
Cheers guys,
Chris
Hello Chris,
Thank you for your email :o) Definitely I agree with you on some things although I do consider that forex is perhaps better than stock trading in the sense that it is not as vulnerable to economic crashes and recessions since these periods are actually the most profitable (due to their directionality in forex). I also find it much easier to exploit mechanical inefficiencies in forex (perhaps due to the lower cost or the fact that I simply now this market better) and I believe that the average compounded yearly returns you can get in forex when you do have a long term edge are bigger than those you can expect from stocks when attempting to do the same thing.
You are also very right about your trading rules. As a matter of fact there are several academic studies regarding mechanical systems on stocks involving those exact same rules. In fact a study published in 2006 and revised to add data in 2009 shows that you can just buy stocks at all time highs with a 10x 20 day ATR trailing stop and achieve an average return bigger than that of the market. I will probably talk about that study on a later post but it does show that simple trend following in stocks works pretty well, especially since stocks in “all time highs” are trending strongly by any standard.
However – as I said on the post – I consider forex a better vehicle for long term wealth building (due to the higher average compounded yearly profits and lower capital requirements) while I consider stocks a better market for “all or nothing” bets since potential rewards are simply much higher. Thanks again for your comment ! :o)
Best Regards,
Daniel
very nice article. I completely agree with you, stock is the best way of making money beside real estate
i go for stocks. my friend is doing forex. and I earn more than him doing stocks. finding the right stocks is not hard for me I buy when stocks are good and short if its not good. it does not mater if the market is up or down you still make money in anyway.
Good article, However, with limited funds, it will be very hard to really get into some of the more interesting stocks out there. Becuase of my own limited budget i try to find underpriced stocks, or atleast stocks under 1 USD each.
Then read this article about Richard Dennis, who made a bet with some friends/colleges he could turn “random people” unscholared etc into forex trading millionairs. All he needed was to train them for 2 weeks, and 3 years after they started, the group of people (i believe it were 16), earned a total of 180 million Dollar.
What i’m trying to say is that if you dont have a few 1000 usd to invest in stocks, like myself. Maybe grinding through the Forex at first to “afterwards” start investing in stocks sounds like a good option?
I agree with you MKattenberg. With only a small or limited amount of funds it is hard to find a good company to buy shares. and even if I found one, only a minimum to few stocks can be bought
I totally agree as you said stocks trading is better idea for short term profits than forex which always keep your heart pumping for any sudden movement in the market. Few years ago I invested $5000k in forex and get nothing because of many factors i.e. lack of experience, non putting of stops, un-design market moves and using bulk of strategies & indicators which donot work right in time.
However, in past I made some amount from stocks trading but at that time I have no facility of live account and knowledge to predict the market trends even with simple averages line. But, I think in case of low price stocks a martingale strategy could be easily applied to win the trade with no loss.
Regards,
Tanveer