Foreign Exchange and Stock Market Trading are often bundled together in the public perception. Forex is advertised and an “easy money” activity. However, that idea is both risky and an over-simplification. What I intend to cover here will try to give some explanation of the characteristics of Forex , your characteristics to trade, and the differences between stocks , options and Forex.
The Differences between Forex and Stocks
The Stock market is essentially an enabling forum for buying and selling of stocks for financial reward. The stock represents the monetary value that a particular company has raised. The money is given by investors (stock or shareholders) to a company . The money is meant to be used to expand the company and thus create a profit. To invest and trade in stocks requires information on a vast number of companies and trends. In most cases people will tend to go for niches they understand. Stock Markets work around the globe in a series of country based financial centres. These centres have normal business days as you can see by the opening & closing bells in Wall Street.
The Foreign Exchange Market has several abbreviations; FX and Forex. It is where currencies are traded. It is a huge market, over 3 times larger that the combined stock and futures (options) trading markets. In this market currencies are traded as pairs; you buy one currency and sell another. This is normally done via a registered broker.
What type of approach is needed?
To carry out trading requires some personal characteristics. As I said in the headline, many see Forex as the route to easy money. People get taken in by some of the scams and promises losing a lot of money. To make trading work you need to invest time and have patience. You need to be the type of person that can keep cool and not go into the gambling mentality. The risk element is there, but it needs to be a calculation.
Your financial situation is also a key factor, losses can occur and you need to be able to afford them. To work in Forex requires thinking as a businessman, there is risk and reward. The type of person who s looking for a way to get rich quick without any effort will most like end up very poor.
How to Start
The first step is to understand the market and the forces behind it. Get to know who trades currencies and why? This will allow you to identify successful trading strategies and use them. The main FOREX: players are governments, banks, corporations, investment funds, and traders. They all have specific rules and regulations. Individuals (traders) do not have these guidelines. To begin trading look at the strategies the main players follow and try to emulate them. In later articles I will go into more detail and suggest some resources to do this. Here we are just beginning the overview.
To begin, one of the main skills need is the application on basic money management. This means understanding what equity you have available and how to limit any risk. The mechanism to do this is the stop loss , used in many trading environments. You set an affordable level to lose, and automate the pull out of a trade. The tactics involved in applying this tool is key to trading in Forex.
I hope this brief introduction is useful to you. Later we will add more articles and go into greater details, covering different world markets such as Asia showing the differing approaches needed.
