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Day Trading vs Forex: What's the Difference?

Posted by BluFX on 07-Sep-2020 08:52:47

 

Day trading vs forex

Day trading vs forex: what’s the difference between them - and which one is right for you? Each one has its own unique differences, and each will suit a different type of trader. Here, we take a look at the key differences between the two so you can decide which is best for you.

How much do traders really make? Find out in our blog, What is the Average Trader Salary?

Read What is the Average Trader Salary? ⟶


Day trading vs forex: which is right for you?

 

Day trading

Forex

Leverage

Less access to leverage

More access to leverage

Time

Trading during the day

Doesn’t limit you to trading during the day

Scope

Thousands of business models, industries and sectors

A few major currency pairs

Market

Benefit largely from bullish markets

Benefit from bullish or bearish markets

 

Forex offers more access to leverage

Leverage can be a very powerful tool for making money - but it can also be a good way to lose it. Access to leverage in stock trading is much more heavily regulated. In forex, due to the nature of forex trading, it is more widely accepted. 

Because of the large sums of currency involved, it would be hard for an average retail trader to trade without leverage. Historically, a standard lot size for trading forex was 100,000 units of currency. While the size of the orders has been reduced, leverage still greatly helps forex traders multiply their gains.

In the US, Regulation T was established by the Federal Reserve in an attempt to regulate the way that brokers lend money to traders. Short traders must have 150% of the value of the stock sold. At the time of the sale, the 150% must be held in a margin account. Leverage in the forex market is much more generous. As opposed to needing to have 150% of the stock’s value as in the stock market, in the forex market you can receive leverage as high as 20:1 for regulated brokers.

Want more trading tips? See our blog on 3 Best Forex Trading YouTube Channels

Forex doesn’t limit you to trading during the day

When considering day trading vs forex, it’s important to think about the time you have to trade. Like the stock market, the forex market is open five days a week. But unlike the stock market, the forex market is open 24 hours a day on those five days. This means that you don’t necessarily need to trade during the day. You could even hold a full-time job during the day and then trade forex at night.

If you trade EUR/GBP at night in the UK, you will likely find that the price doesn’t move very much. This makes for poor profit potential. For more volatility, you may want to specialise in a currency pair that is heavily traded in your time frame. For example, if you live in the UK and start trading at 6 PM, the USD/CAD (U.S. dollar/Canadian dollar) would be a good pair for you to trade as the time of both the US and Canada are such that the trading in this pair would be most active. The Sydney session of the forex market opens around 9 PM UK time, so pairs involving the Australian dollar would get a boost. 

The premise of day trading stocks is getting in the market and getting out by the end of the day, because keeping your position open overnight increases risk. With forex, you will only have to worry about weekend risk. You could open a forex position during the day or night and rest assured that the market will stay open during the week. If you set a stop loss, it will be triggered. This is in contrast to having a stock’s fundamentals collapse overnight with the price gapping at the open and opening far below your stop loss before it can even be triggered.

Forex has a few major currency pairs, while day trading stocks offer thousands

This distinction between the forex market and the stock market is not a clear-cut benefit for either type of trading. In the forex market, there are relatively few financial instruments that you have to understand. As it relates to the stock market, there are thousands of options. Each of these stocks has a range of different business models, industries and sectors. On the one hand, forex has few currency pairs, but each pits one national economy against another.

Economies are vastly complex, especially in relation to a company. Then consider that you must understand the balance of one against another, and that doubles the complexity. In terms of understanding the fundamentals of a currency pair, it is much more complex than a stock. However, there are many more stocks to keep track of. Stocks can offer thousands of different opportunities, which is much more than the hundred or so currency pairs available in the forex market.

Which one is better is a matter of personal taste. Forex offers fewer instruments for you to keep track of, allowing you ample time to study and master them. Stocks give you a multitude of different companies, which each offer distinct opportunities, but can be unwieldy to keep track of. In terms of day trading vs forex, this one is a tie.

The most successful trading is the result of an effective trading plan. See our 8-Step Trading Plan Checklist here.

Forex allows you to easily benefit from up or down markets

This is another key factor when considering day trading vs forex. The stock market is most powerfully driven by good economic times. When the economy is running on all cylinders, more investors enter the stock market. The good times continue on and on, continuing its momentum forward and encouraging even more people to get in on the action. It is this kind of market that’s great for day traders because it’s not uncommon to see stocks rise 20-30% in one day. 

Just when everyone is expecting the stock market to keep going forever, that’s exactly when the market begins to wane. For many stock traders, this means a significant drop in opportunities. That’s not so with the forex market.

When the economy is down, it can be possible to gain from shorting the stock market. However, this type of trading is heavily regulated in the stock market - almost frowned upon. In the forex market, such stigma does not exist. Since forex pairs are designed as a mechanism for exchange, buying one or selling the other are simply two sides of the same coin. Since there is no distinction, regulatory or ethical, about buying EUR/USD or selling EUR/USD, that means you can take advantage no matter which way to market is heading.

Forex offers more freedom from regulation 

Day trading vs forex also comes down to regulation - or lack of. As forex is a global market, it can be quite cumbersome to regulate. Banks are a major part of the forex market and they are heavily regulated. The increased interest in forex trading has led many governments to take a closer look at the forex market. As regulators have seen more money entering the forex market, countries have also put the pressure on retail brokers as part of their ever-growing mandate to protect the public from themselves. 

Forex, like any other market - stocks included - suffer from scams. But due to the fact that it still retains some mystique amongst the general public, forex is often considered shady or a scam at a higher rate than the stock market. Perhaps due to this stigma, regulation has made its way to the forex market. But the leverage limits imposed by regulatory bodies are still quite lax when compared to those governments have given the stock market. 

The regulatory bodies that pertain to different jurisdictions include the Australian Securities and Investments Commission (ASIC) and the FCA (Financial Conduct Authority) of the UK. These agencies make it their goal to protect consumers in their respective countries.

Read 3 Best Forex Trader YouTube Channels ⟶

Tags: Trading Tips

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