Although currency pairs and stocks are part of the financial industry, the trading process implies multiple differences that, if not considered, can lead to inconsistencies and inaccurate market positioning.
The four aspects talked about in the present article don’t represent a complete list, but are among the most notable differences that traders should pay attention to.
The first important difference is volatility. Stocks are generally more volatile than currencies, with various implications on how different trading strategies can be used. Technical analysis becomes more challenging when volatility is high, which means stock traders need to focus on other variables such as company earnings, multiple expansion or compression, interest rate fluctuations, and options trading activity.
In the currency sphere, daily ranges are very tight when compared to stocks, creating an ideal environment for traders with low risk tolerance. However, very low volatility is a situation in which traders don’t want to be stuck, considering only price fluctuations can lead to returns.
If forex traders are focused on figures such as gross domestic product (GDP), unemployment, inflation, and PMI indicators, conditions are slightly different for stock traders. They need to have at least a basic knowledge in accounting, in order to understand notions like price-earnings rate (P/E), net margin, debt-to-equity, EBITDA, and many others. Fundamentals are important to monitor since large institutional players are keeping track of them when adjusting their long-term market positioning.
Closely linked to volatility, liquidity is another major difference between the FX market and stocks. On one side there is the largest financial market in the world with over $5 trillion in daily volumes, and on the other, the stock market with significantly less daily liquidity.
Higher liquidity also relates to a larger number of buyers and sellers at any given price. The implications go beyond price fluctuations, as better liquidity leads to tight trading spreads, attractive costs, and more accurate trade execution.
Traders need to consider all these variables since over a longer period of time, their overall performance can be heavily influenced by them. It does not matter if they use a forex app or one of the well-known stock trading platforms, since liquidity depends on broad market participation.
Ultimately, there are major differences in terms of trading schedules. The forex market is open 24/5, while in the case of stocks, there is a window ranging between 8-10 hours a day when prices fluctuate. Also, the Tokyo, London, and New York sessions are the most important to consider, given these are the most important financial centers in the world, based on daily trading volumes.
All of these differences between FX and stocks mean that trading strategies should be adjusted to each asset class. However, trading both currency pairs and trending shares in tandem can ensure effective diversification for traders. The elevated volatility and poorer liquidity of stocks are balanced by the more stable prices and better liquidity in currency pairs.