Both stocks and forex pairs are important asset classes that offer many opportunities for traders and investors alike. And while both can be profitable, there are important differences between the two in terms of their nature and the appropriate approach to trading them.
Here we explore those differences.
Differences in fundamental analysis
Forex pairs usually consist of two currencies paired together, which means that to analyze a currency pair, you need to analyze the economies of both currencies. For example, if you want to trade EURUSD, you should analyze the economies behind both the Euro and the US dollar. You will have to look at the growth rates in both economic areas, in addition to the unemployment rates, inflation rates, and other important rates that indicate economic performance. Based on that you can decide which economy is moving faster. If, for example, the US economy is growing faster than the Euro area, then you should consider selling EUR/USD, and vice versa.
With stocks, you do not need to look at the performance of two economies. Instead, you need to study the financial statements of the company in question, its markets and their rates of growth, the trends of the industry, and the competence of the management. This enables you to assess the potential growth of the company and its prospects.
Difference in compatibility and approach
Even though technical analysis is the same across different asset classes, forex pairs and stocks are not the same when it comes to compatibility.
Forex pairs are more suitable for day traders who want to take advantage of the high volatility and liquidity in the forex market, which as stated by easyMarkets can reach a daily trading volume of $5 trillion.
Stocks, on the other hand, are more suitable for investors (rather than traders) who want to buy and hold for a while. Both can be profitable if trading is practiced well. However, you need to find out which instrument suits your personality better.
If you are a trader, then it is better to trade FX pairs, but if you are an investor, then it is better to buy stocks.
Differences in technical analysis
Chart patterns are usually valid on both forex and stocks charts. However, there are some differences. Gaps are more likely to appear on stock charts than forex pairs, although weekly gaps are usually on forex pairs. Moreover, stocks usually trade only during daily opening hours, whereas forex pairs are available 24 hours a day 5 days a week.
Despite this, generally speaking, technical analysis is pretty much the same in both forex pairs and stocks. This is because investor sentiment manifests itself similarly in both cases. This means that triangle patterns, channels, flag patterns, trend lines, and other technical tools apply pretty much the same.
Both forex pairs and stocks can be good instruments to take advantage of in the financial markets. Stocks tend to move slowly and require more patience. However, they can pay dividends and grow in value. Forex pairs, on the other hand, are volatile and change direction constantly. Thus, it is slightly more challenging to keep positions open over the long term.
Regardless of which asset class you choose, remember to diversify and manage your risk diligently.