Forex vs Stocktrading

Beginner Questions
1

[B]This post is dedicated to Jlmac27 who requested that I do a comparison. I ungraciously forgot about the post but I remember it now. I cannot seem to find the thread so I have started a new one.[/B]

[U]This post might be a little long [/U]so I will try to keep it interesting. Please note - they are my views - you may disagree.

The Australian stockmarket is very safe. There are no market makers and no leverage. Gerald Appel, the inventor of the MACD, says “the stockmarket advances approximately 75% of the time”. Now, who are we to argue with him!
So if you hold your stocks long enough, or in an intraday bull rally, you are almost guaranteed to make money. I am assuming that the stock you enter is not a company about to collapse - even then you usually get plenty of warning.
Our market here is doing incredible things - and the money to be made is huge!

We are taught to set a stop loss and activate it if the market goes against you. But my brother, who is a millionare from trading the stockmarket disagrees - “stop loss is make loss” …he says.

"A lot of that stuff you read in those books is rubbish. They are written to make money because the author cannot trade successfully himself "

His policy is to wait if a stock goes down - they always go up again…just be patient and wait.
This agrees with Gerald Appel’s statement.

“But what if the share tanks and I lose all my money?” …I ask.

“Only if you are silly enough to by a dud company”… he replies. “All others always go up”.

I firmly believe he is right - and he has the money to prove it.

I remember buying James Hardie. The asbestos claims came thro and the share plummeted. :eek::eek:
I stop lossed ie I bailed out with a large loss.

“Silliest thing you could do” …my brother said. “This is a very sound company”

Sure enough, several months later, the share not only returned to my buy price but roared on ahead. Had I kept the share, I would have made record profits.

So today I trade the share market differently - I forget about the stop loss.

Am I successful (daytrading). Absolutely!

NEXT POST - FOREX

2

There are market makers. You may not see them, as they are not as visible as a dealing desk forex broker, but they are there. All markets have them in one way or another. There’s too much money to be made buying at the bid and selling at the offer for them to stay away. :slight_smile:

As for leverage, I’m not expert on Australian market rules, but are you saying you cannot purchase stocks on margin?

Gerald Appel, the inventor of the MACD, says “the stockmarket advances approximately 75% of the time”. Now, who are we to argue with him!

Be careful with this statement. I can neither confirm nor contradict the figures, but I believe Appel was making that statement in a broad scope. You cannot extrapolate that down to day trading and say that 75% of the time any given stock will finish the day higher. Run the figures. It will be much closer to even odds.

So if you hold your stocks long enough, or in an intraday bull rally, you are almost guaranteed to make money. I am assuming that the stock you enter is not a company about to collapse - even then you usually get plenty of warning.

Keep in mind that Appel’s figures include long periods of time (like whole decades) when the markets were going nowhere. How long is your holding period? If you can sit on something for years then you’ve got a very good chance of coming out ahead (assuming you don’t own Enron, or something like that), but you also have to be aware of the opportunity cost of holding something for that long. You might make 50% on a position, but if you do it in 10 years is that really worth it?

Our market here is doing incredible things - and the money to be made is huge!

Hmmmm. Where have I head that before. :smiley:

We are taught to set a stop loss and activate it if the market goes against you. But my brother, who is a millionare from trading the stockmarket disagrees - “stop loss is make loss” …he says.

Won’t necessarily disagree here. It depends on your trading approach.

"A lot of that stuff you read in those books is rubbish. They are written to make money because the author cannot trade successfully himself "

And a lot of that stuff in books is quite worthwhile, for those at whom they are targetted. It’s about figuring out what is right for you, then only targeting the books (or whatever) which help further you along in that regard. Most of what’s out there - especially stuff that is very specific in terms of market or method - will be wrong in one way or another for most people.

His policy is to wait if a stock goes down - they always go up again…just be patient and wait.
This agrees with Gerald Appel’s statement.

“But what if the share tanks and I lose all my money?” …I ask.

“Only if you are silly enough to by a dud company”… he replies. “All others always go up”.

I firmly believe he is right - and he has the money to prove it.

Ah, but the real trick is knowing which companies are duds and which aren’t. A lot fewer are duds during bull markets, and alot more are duds during bear markets.

3

[B]FOREX[/B]

The forex market is very different, as you all know.

It is unregulated, leveraged and is very risky by comparison.

Because of the leverage, you cannot afford to do without a stop loss. Margin calls become a real possibility. The market can go both ways - there is no sound company to back you up. There are no dividends either - unless you think of a positive rollover as a dividend.

Further to this, your broker does not have to display integrity. All sorts of undesirable things can happen to your trades…and do! :eek: :eek:
This adds to the risk. I can withdraw my funds online to an ATM anytime with my stockbroker. Now try that with your forex broker!

In forex you have rollovers, and, with long term trading, loss positions may be debited against you after the first rollover, assuming your position remains in the negative.
Again, another risk.

Because the market can go both ways, it is easy to lose money when aided by only technical analysis. Predictions are not always right, a stop loss is mandatory, so losses are inevitable as the wrongly predicted trade hits the stop loss.

In the stockmarket, you can ride out a losing position by not setting a stop loss and simply waiting.
Now that approach would be suicidal in the highly leveraged forex market where no stop loss would end up with a margin call if your trade goes the wrong way.

*                      *                             *                        *

Despite all this, I believe the forex market has certain advantages.

It is a 24 hour market. This means you can trade in [U]your [/U]time and set [U]your [/U]hours. A little discipline and planning …and with skill, you have a career.

The forex market goes both up and down. This means you can go long or short, unlike the stockmarket where long is the only choice. When the price goes down in the stockmarket, you have to wait. In the forex market, you change tack and simply go short ie no waiting.

The forex market moves very fast. I have found that even though I make the vast majority of my earnings on the stock market, my smaller forex earning are made much more quickly. ie less time per unit dollar.
Some stock companies move very slowly - you can sit for ages watching the computer to see a small increment.
With good leverage and (I use scalping) money can be added to your wallet very rapidly in the forex cfd market.

Finally, you can solve some, if not all of your broker problems by using an ECN broker. These brokers charge commission straight out of your funds and then [U]all [/U]the pips are yours (mostly). Integrity can be found in these brokers.

NEXT POST…FINAL COMMENT

4

[B]FINAL COMMENT.[/B]

Now while I was typing my second post, unbeknown to me, Rhodytrader was typing a reply to my first post.

I have just discovered his post, so I will complete my reply here.

For me right now, the jury is out as regards which is the better one to trade - forex or stocks.

But I will say this - my own personal experience is that the stockmarket is definitely safer. I would have lost all my money had I entered the forex market first. There is much more control, expert help etc, etc, etc with the stock market and for a beginner, I would recommend it to start.

And why not stay with stocks? Like my brother, I am doing very well with it just now, so I am not about to leave. Gold is an excellent stock right now. Also I have the proven back up of “Fat Prophets” a share selection company with a fabulous track record.

Finally, with stocks, you are investing in a company. They can use your money and you can get dividends (high interest). Your money is doing something useful.

But what about forex? I understand it is a zero sum game. You are producing nothing and…is your money an ill gotten gain???..because someone else loses while you gain.

Now a reply to dear Rhodytrader.

Look, I understand you have a book to sell, and it is all about forex. My write up about the stockmarket is not necessarily helpful to your aim to sell your book.

I can therefore sympathise with your desire to take my post on sharetrading apart. Your reply was very prompt indeed.

However, I do not have any such bias, and, as such, my claims on sharetrading stand. I still think that Mr Appel is right with his statement on the sharemarket going up 75% of the time.
A man of his stature in not someone I would like to argue with.

My own experience is that the Australian sharemarket at present is going up [B]all [/B]the time !! :slight_smile: :smiley: :slight_smile: :smiley:

5

Say rather it’s regulated to a lesser degree because it’s not completely unregulated, and the degree varies from country to country.

It’s only leveraged if you actually employ leverage.

Risk is a function of how you trade, not the market you trade.

Because of the leverage, you cannot afford to do without a stop loss. Margin calls become a real possibility. The market can go both ways - there is no sound company to back you up. There are no dividends either - unless you think of a positive rollover as a dividend.

Margin calls are a function of employing leverage (which you can also do in stocks). If you don’t use leverage, you won’t get a margin call. And good currencies are like sound companies.

Further to this, your broker does not have to display integrity. All sorts of undesirable things can happen to your trades…and do! :eek: :eek:
This adds to the risk. I can withdraw my funds online to an ATM anytime with my stockbroker. Now try that with your forex broker!

If you’re broker wants to stay in business it does need to show integrity. And don’t think that stock brokers haven’t wondered off the straight and narrow from time to time. As always, do the research and pick a reputable firm.

As for the withdrawls, indeed I don’t know of any forex brokers who will issue you a card for ATM withdrawls, but that’s a relatively new development in the stock market too. Might be that we see it in forex too, eventually. As long as you can get your money from your trading account to your bank account quickly, though, it really shouldn’t matter much.

In forex you have rollovers, and, with long term trading, loss positions may be debited against you after the first rollover, assuming your position remains in the negative.
Again, another risk.

Having a 50% drawdown in a forex trade is the same as having one in a stock trade for all practical purposes. If you have to withdraw your funds it won’t matter whether you’re in stocks or forex - except that it will take longer in stocks because of the settlement period.

Because the market can go both ways, it is easy to lose money when aided by only technical analysis. Predictions are not always right, a stop loss is mandatory, so losses are inevitable as the wrongly predicted trade hits the stop loss.

In the stockmarket, you can ride out a losing position by not setting a stop loss and simply waiting.
Now that approach would be suicidal in the highly leveraged forex market where no stop loss would end up with a margin call if your trade goes the wrong way.

Again, how you trade determines your risk, not the market.

*                      *                             *                        *

Despite all this, I believe the forex market has certain advantages.

It is a 24 hour market. This means you can trade in [U]your [/U]time and set [U]your [/U]hours. A little discipline and planning …and with skill, you have a career.

True, though, stocks are becoming increasingly 24-hour.

The forex market goes both up and down. This means you can go long or short, unlike the stockmarket where long is the only choice. When the price goes down in the stockmarket, you have to wait. In the forex market, you change tack and simply go short ie no waiting.

Long is not the only choice in stocks. You can go short too. And stocks most certainly go both up and down. It’s definitely not a one-way street. Shorting is a little bit of a trickier process, though.

The forex market moves very fast. I have found that even though I make the vast majority of my earnings on the stock market, my smaller forex earning are made much more quickly. ie less time per unit dollar.
Some stock companies move very slowly - you can sit for ages watching the computer to see a small increment.
With good leverage and (I use scalping) money can be added to your wallet very rapidly in the forex cfd market.

That last sentence is the key. Leverage. If you compare the actual price movements between stocks and currency pairs you will see that stocks tend to be much more volatile in % terms.

Finally, you can solve some, if not all of your broker problems by using an ECN broker. These brokers charge commission straight out of your funds and then [U]all [/U]the pips are yours (mostly). Integrity can be found in these brokers.

ECNs do definitely offer advantages over deal desk brokers. Just because you are trading with an ECN, though, doesn’t automatically mean you’re dealing with more ethical and reliable folks.

Please note that I’m not making these counter points to rip tymen here. My intention is to make sure absolute statements are not made where they should not be and factual errors are not introduced.

6

I would argue that neither is better, at least not in any absolute terms. It is for each trader to make the decision. For some it will be one. For some it will be the other. Heck, for some it will be neither and for others it will be both! :slight_smile:

Now a reply to dear Rhodytrader.

Look, I understand you have a book to sell, and it is all about forex. My write up about the stockmarket is not necessarily helpful to your aim to sell your book.

I can therefore sympathise with your desire to take my post on sharetrading apart. Your reply was very prompt indeed.

However, I do not have any such bias, and, as such, my claims on sharetrading stand. I still think that Mr Appel is right with his statement on the sharemarket going up 75% of the time.
A man of his stature in not someone I would like to argue with.

My own experience is that the Australian sharemarket at present is going up [B]all [/B]the time !!

I’ve never been able to figure out why people assume that my book is about forex. Forex isn’t in the title and there’s nothing forex-specific on the cover. Yet folks still draw a forex focus conclusion for some reason.

Maybe it’s just because I spend time on sites like this one. The book is actually general - about all markets. This forum is about forex, so on it I mainly talk about forex. I trade all kinds of stuff, though, most definitely including stocks. That’s where I got my start 20 years ago and I seriously doubt I’ll ever not be active in it. Forex came along a bit later.

Oh, and my current day job is as a stock market analyst.

As for George Appel, I’m not arguing against him in the least, just saying that those statistics relate to a specific timeframe and should not automatically be ascribed to the timeframe any specific individual trades in.

7

I agree wholeheartedly with you John. There are so many ways to trade, so many time frames and interpretations of market information that it’s impossible to say what is right or wrong.

As i have quoted Brett Steenbarger in a previous thread, i will do so again in this one because i find it so very important for all of us to keep the right perspective on things:

“There are no right and wrong trading strategies, only what is right or wrong for us”

8

Brett’s the man! :cool:

The other day I was listening to the recording of a call I did with him back in February. He hits things so rightly, especially when it comes to the trader development process.

9

Thanks for the dedicated post!!But I did not ask for it??:confused:I will follow along though it is a good post:) good trading!

10

Thanks for the replies.

They are, however, I feel, coming from an American point of view.

I will now reply with an emphasis on the Australian view point. Sorry if it appears long, but it is all quotes and short replies. I hope it is of use to readers.

There are market makers. You may not see them, as they are not as visible as a dealing desk forex broker, but they are there. All markets have them in one way or another

I checked this statement by Rhodytrader out. Yes, some market makers are sub-contracted in the background but it is very low key for stocks. Not so with options and warrants where it is obvious…

It’s only leveraged if you actually employ leverage
.

Point taken but when do you trade forex without leverage? Who offers such? And what money would you make?
I’d like to see that! :stuck_out_tongue: :stuck_out_tongue: :stuck_out_tongue:

Margin calls are a function of employing leverage (which you can also do in stocks). If you don’t use leverage, you won’t get a margin call.

Precisely my point about risk. In forex, with leverage, you risk margin calls. This risk does not exist with Australian ordinary stocks that not leveraged - nor can they be.

Long is not the only choice in stocks. You can go short too.

Now in Australia, you cannot short stocks - at least most brokers will not allow it. My brother has shorted thro Comsec but says it is very difficult and not worth the trouble.
In Australia, we have Contracts for Difference (CFD’s). These can be shorted and they are leveraged as well. But then, with the higher liquidity and higher volume, I would rather trade forex.

stocks are becoming increasingly 24-hour.

No chance in Oz. Here it is 6 hours/day, 5 days a week, no trading on holidays. Australia, truely is the land of the long weekend. Why work when you can sit on the beach with a cold one.

I’ve never been able to figure out why people assume that my book is about forex.

You answered your own question in the next paragraph.

To finish…I stated :

For me right now, the jury is out as regards which is the better one to trade - forex or stocks.

Rhodytrader replied :

I would argue that neither is better, at least not in any absolute terms

and Pipbull :

I agree wholeheartedly with you John.

You people have misunderstood me. My comment was for me [U]personally[/U] - note the “for me”.

I am still choosing between the non leveraged share market here which is doing much better than Wall st. Predicting for up only is easy - there is no other choice !!!

Or the highly leveraged forex market where margin calls are a real possibiliy. Predicting here requires a choice of 2 ways (up or down).
Now we have to think and the possibiliy is that you could be wrong. (more risk).

11

Are you sure about that? I did some looking around and it definitely seems to me that margin trading in Aussie stocks is going on.

Now in Australia, you cannot short stocks - at least most brokers will not allow it. My brother has shorted thro Comsec but says it is very difficult and not worth the trouble.

I did see some stuff which suggested shorting is a onerous process for you, which I’m sure does limit who even considers it. That said, the vast majority of US stock traders don’t short either. I’ve been in the markets for a long time and have never shorted a stock, though I have played the short side through put options and futures.

No chance in Oz. Here it is 6 hours/day, 5 days a week, no trading on holidays. Australia, truely is the land of the long weekend. Why work when you can sit on the beach with a cold one.

Certainly only the largest of global names do any real trading outside their home market.

I am still choosing between the non leveraged share market here which is doing much better than Wall st. Predicting for up only is easy - there is no other choice !!!

Or the highly leveraged forex market where margin calls are a real possibiliy. Predicting here requires a choice of 2 ways (up or down).
Now we have to think and the possibiliy is that you could be wrong. (more risk).

I’m still not understanding how the Aussie stock market can only go up. Please explain your reasoning for that claim.

12

To Rhodytrader :

Just seen your post late at night after a long day.

I will consult my brother and also my books to maker sure you get an accurate answer to your first question.

The second is a matter of mis-interpretation. I will clarify this tomorrow as well.

14

Reply to Rhodytrader : LONG POST - SORRY.

I did consult my brother concerning your 2 questions. His answers were very professional, making me look like a total beginner! :o :o :o

You asked :

I did some looking around and it definitely seems to me that margin trading in Aussie stocks is going on.

Yes, it is quite possible to borrow money to increase the number of shares you own. It is always being offered to me thro my broker but I have been advised against it for safety. But this is margin lending and not leveraging the stocks. ( two different terms, I think).

As far as leveraging goes, I am told that some companies invest thro managed funds (I am trying to remember from a whole lot of data given me)
and use gearing. But the risk is “right up there”, I am told. Generally, no leveraged stocks - CFD’S for this.

Further, shorting can only be done by a few brokers, Commsec being one. Most of these are the lesser known brokers and the international brokers. My brother tells me that, even so, it is tricky and “you have got to know what you are doing”.

Now you asked :

I’m still not understanding how the Aussie stock market can only go up. Please explain your reasoning for that claim.

I was simply referring to the fact that to make money, a stock (with no leverage) only has to go up. If it goes down, you make nothing. You must wait until it does go up. Waiting is not so bad.

But in forex, you have to predict both ways to make money. If you get it wrong, you could wait, but with leverage generating margin call possibility, thus forcing a stop loss - you will suffer loss. Therefore, to prevent loss, it is important to get your prediction correct.

I feel, therefore, that the mental strain on predicting an unleveraged stock is less than that for forex. I am not saying that stocks cannot go down - that is rediculous.

Mental strain is one of the things I am considering in trading.

But as we have said before, stocks, with time, “providing they are not duds” will go up.

To sum up, I would like to quote from Leon Wilson, Australian Master trader and author of several books, 2 of which I own. He also runs a website…The Traders Shop

You may know of him.

In his book…THE NEXT STEP TO SHARETRADING SUCCESS, ch 15 - An Introduction to Bear Trading, he states :

…(regarding CFD’s) “They allow for both long and short positions, which will allow the professional trader to earn a more consistant income throughout fluctuating and bearish market conditions.”

The more consistant income is something I am very much considering, rather than waiting all the time for down shares to go up again.

Finally, he also states : (re CFD’s)

“…unfortunately they will prove to be the undoing of many people who lack the trading experience of discipline to correctly manage leveraged instruments”

This I am also taking into account.

15

Hello, Tymen. I don’t need this post dedicated to me, but I do need to thank you for your post. I may not have been the only one, but I did explicitly ask you for this comparison. Thank you for your very thorough response.

I’d also like to thank John. I believe you and John both offer very good opposing views. It’s all good information for me.

Thanks!

16

Ah ha !!!

It was you, BenU, who asked for the comparison - I got the people mixed up and I tried to find the original thread but could not find it. :confused:

My apologies, but I am glad you liked the treatment.

I would rather have Rhodytrader work with me rather than generate opposing views because, like my brother, he really knows what he is talking about.

Such a person is great to have on this forum.

Good trading to you! :slight_smile: :slight_smile: :slight_smile:

17

Margin and leverage are hand and glove. Leverage is the process of controlling a larger position than you could just using your own funds. Margin borrowing (lending from the broker’s perspective) is what allows you to do so.

But as we have said before, stocks, with time, “providing they are not duds” will go up.

It’s generally true that in the long term a good stock will go up, but there are alot of variables in the mix. One you mentioned - picking good stocks. That’s got a complexity all of it’s own, of course. Perhaps more importantly, though, is the time factor. If you buy a stock and have to sit on it for years before it turns a profit for you, you are taking a loss. You’re losing the opportunity to put that money to work in other ways - opportunity cost.

18

I would now like to wrap up this thread by posting some final comments, then giving my personal considerations in making my choices. Feel free to reply but this is my last post. (LAST LONG POST)

Firstly, with regard to market makers on the Australian Stock exchange. I emailed Master share trader Leon Wilson, author of several sharetrading books and very highly repected in trading circles. I asked him “are there market makers on the ASX?”

Here is his answer copied and pasted directly from his email to me :

Hi Tymen

The short answer is yes though not quite in the same context as in the US. Volume spread analysis is a means of following the makers though this is a very complex area that is more commonly applied to the US market.

Market makers differ locally to those of the US due to liquidity issues as its simply not possible to move big positions on the bid and ask without excessively moving the market in the process.

Cheers
Leon

Now Rhodytrader said :

If you buy a stock and have to sit on it for years before it turns a profit for you, you are taking a loss.

In Australia, at this time, this is certainly not the case, as the stock adviser Fat Prophets advertises : (a long avertisement - a few quotes here)

“�Australia’s Leading Independent Stockmarket Advisors”

Fat Prophets was founded back in 2000. We are owned and operated by financial market professionals. We consider ourselves to be one of Australia’s leading independent stockmarket advisors.

The great stockmarket roller coaster of 2007 just carries on and on�

If ever you needed proof that mining companies believe in the longevity of the resources boom, surely BHP’s takeover offer for Rio Tinto was it.

Forget the US economy and Wall Street�the story today is China, and that story is not going to slow down any time soon�

Then there is the interview with Contango Asset Management’s chief investment officer Stephen Babidge in the same newspaper which says�

“�the commodities boom is only semi-evolved and resource stocks are still the best way of playing the market - both locally and globally - regardless of whether the US economy slips into recession.”

A little further down you can read about our superior investment record, including how for the 12-month period from 1st October 2006 to 30th September 2007, the Fat Prophets Mining & Resources hypothetical portfolio gained a stunning 61.8%!*

The Hunt For The Next Huge Stockmarket Winner

The hunt for the next Carnarvon Petroleum is now officially on.

Could it be Terramin Australia, up a breathtaking 786%* since we first recommended it as a buy back in December 2005?

Or could it be Platinum Australia - up an amazing 578%* since we first recommended it as a buy back in November 2005?

Or could it be Image Resources, up an astonishing 538%* since we first recommended it as a buy also back in November 2005?

ENOUGH SAID.

As I see it ordinary shares have a lot to offer. And I do well as a daytrader. The downloads to an ATM are a big plus.

I do not have to worry about a stop loss, the shares always go up again if they dip - I rarely make a loss. The commissions are paid for and all the profits are mine.There is no leverage and, thus no margins calls to worry about. In short, fairly stress free trading.

However, there is more than 1 minus.

When the stocks dip, I have to wait. This happens frequently and is very annoying. With forex, you can trade both ways so there is no waiting. Surely it would be rare that the 4 majors all trade sidways for an extended period simultaneously? So therefore, a more consistant income could come from forex trading.

24 hour trading becomes a big plus. For me, with medical sleep problems, the forex market is much more user friendly. Discipline is needed though, to stop you from sitting in front of a computer all day. Set a given number of hours.

One has to watch out for the leverage, however, and the attendant need for a stop loss. Now the ability to be wrong in direction picking and, hence, to make losses, becomes very real.

My money still stays in Australia, but with forex, no download to an ATM. A real nuisance to me.

My ultimate choice - an ECN broker in Australia with funds deposited in one of our local 4 major banks. Downloads to an ATM option on the website.

Maybe a broker like EFX will open a branch in Australia (even Perth!!) :smiley: :smiley:

19

Hi,

You and only you are capable of judging what suits you best and it what way. You must determine which side you can play for, it could be Forex trading and it could be stock trading. All you need to do is put your skills to the test, and whatever wins, may the odds be ever so in your favor!.
Source: What’s Your Match: Forex or Stock Trading?

20

Both of the investment businesses have their pros and cons. I, myself, prefer forex trading as you have more control in it than stocktrading. And i like to invest in something that i have control over. What is your prefered choice? Think before picking any one.