Trading currencies is a difficult endeavor with a high demand for knowledge, patience, and resilience. So, there might be a moment of time when you ask yourself: is there a better place to do business in trading? There are many venues for trading: stocks, futures, options or CFDs. Now, there are cryptocurrencies as well.

How to make a conscious decision of what place to be in? To make a long story short, there are no “easy” markets. Every market which you trade, has its particular features. Does it make sense to make a “transition”? To be able to answer this question, you have to know the key differences between different markets and associated trading styles.

I’ve been trading them all, so I may give you a piece of advice, which may help you make the right choice.

Enjoy the read!

Forex vs Stocks

Let’s start with the comparison of Forex and Stocks. Almost every country has it’s stock market, though, the largest one, is, of course, New York Stock Exchange and Nasdaq (US based). Such companies as Amazon, Alphabet (Google), Tesla and many others are traded there.

Let’s go through the main differences between Fx and stocks. We will focus on specific nuances related to practical trading.

Liquidity: gaps and trade execution.

The most popular stocks are very liquid, just like currencies. You would rarely face any difficulties in executing your trade. Though, you have to remember that stock market operates quite differently than the Forex market.

Even though it is liquid enough, you might face morning gaps on the opening, when something unusual happens overnight. On the other hand, currencies tend to be more stable historically - gaps occur quite rarely on currency charts, excluding minor situations with sudden political events or “surprises” from Central Banks.

Stocks are influenced by a relatively larger amount of factors: earnings reports, rumors, S&P500 index dynamics and much more.

If you take a look at TRI (Thomson Reuters stock), you will see what I’m talking about. Of course, there are less “noisy” stocks, but the example below shows one of the biggest risks associated with stocks: gaps. For day traders, it’s not so important, of course. But if you are a swing or position trader, you have to be aware of this fact.

TRI stocks

Opportunities

There are more than 5000 stocks available on NYSE and NASDAQ. It might be a good choice for trend-following traders. There are always stocks that trend while most other stocks are declining. If you trade currencies, sometimes you may find that volatility is small across the board, and there’s nothing interesting to participate in. It’s a part of the game: sitting on the sidelines and waiting for the good opportunity is no less important than getting into the trade.

Stock trades, however, have more choice in a case like that. They may search for something that moves. They even have a special term: “Stocks in play”. Sounds good, but, of course, you have to keep in mind that stock traders have limited or no leverage in comparison to Fx and futures traders. It means that your buying power literally depends on the size of your account.

The lesser money you have on the account, the fewer opportunities are available to you. Stocks are usually traded with blocks of 100 items, which means that you’d better have at least several thousand dollars to start. (usually, 20K+ is a decent size of a trading account).

Forex vs Futures

What about the futures market?

Futures are derivatives which allow a trader to gain from price changes of a certain asset without the need of purchasing one. There are commodity futures, stock indexes, currency futures and much more.

Natural leverage

Futures market is designed so, that all products which are available there, have a natural inbuilt leverage, which means that you don’t have to deposit the full amount of cash to own a product (you don’t really own it, you hold it for a limited period of time). For most liquid markets, the leverage may be as big as 20:1 and greater. For newer contracts as Bitcoin future, leverage may be quite small (2:1)

The “leverage” effect makes futures markets attractive for active speculators. You may find lots of traders, who exclusively trade “CL”, “ES”, and other products.

One contract at a time

The first feature of the futures market is that there are no mini, cent accounts, whatsoever. The minimum trading size is 1 contract with a cost of a tick around 10 USD (varies on different products). You either can’t partially close your position if you trade 1 lot or reduce your trading size if your equity curve goes down.

Imagine that your stop-loss should be equal to 15 ticks with a cost of a tick is 10 USD. Your maximum risk has to be 160 USD (15*10 + 1 tick spread) + commission. You can’t reduce it if needed. If you start trading with a small-sized trading account (say, 2-3K), you should place pretty tight stops to survive and employ a high hit rate trading strategy to not generate a drawdown. Most futures brokers now give traders an opportunity to join the futures market starting from 1-2K (with so-called intraday margin) but do the math and you would understand that it would be quite difficult to survive with that.

Volume and open interest

One of the key advantages of futures trading is an access to reliable information on volume and open interest. When you trade Forex, you don’t have real information about volume - you just see the number of ticks in the MT4 trading terminal. That’s not a real volume.

Open interest is another parameter, which shows the number of contracts outstanding. In case, this number increases, it may give a trader a clue that new business is entering the market.

By the way, Forex traders may analyze this information as well. Those who trade EURUSD, may analyze information from 6E (Euro Fx future contract) and align their trading decision with volume and open interest from the mentioned product. Sometimes, it can be very beneficial. I’m a big fan of exchange-generated information and teach traders to read and interpret it for the sake of trading Forex.

Open Interest

Opportunities

What are the opportunities for futures traders? Well, they can trade the same currency pairs just like Forex traders since they have almost the same toolkit (all major currencies are available in the futures markets). Also, they can trade Gold, Crude oil, Grains and many other products, which may not be very liquid and volatile.

In a nutshell, futures markets are very interesting for trading due to transparent auction process and access to different markets, though you can’t join this market with the small account size.

Forex vs Options

Trading options is a totally different world than conventional trading.

First of all, I must say, that I’m not talking about binary options here. There are many scams associated with binary options, so we won’t touch this topic, focusing on traditional or vanilla options instead.

To make the long story short, the option is a contract which has 4 parameters: vega, gamma, delta, and theta. The traditional trading instrument has just 1 parameter: price. It may either “high” or “low”. The option is a derivative, which provides a more complicated view of the market.

There are basically two ways to trade options now: to trade options-on-futures or vanilla forex options. The former ones are traded on the exchange (for example, CME or CBOT), the latter are provided by some Forex brokers.

Features and nuances

Why some traders prefer trading options rather than conventional products? You won’t go deep into the detailed explanations of what options are (you may find them in 3rd party resource of your choice)

First of all, options trading doesn’t include stops. If you buy a call option, your maximum risk is limited to a premium which you pay while buying an option. Conversely, if you sell an option, you receive a premium from a buyer. If the option expires “out-of-the-money”, the buyer loses the premium paid, while the seller collects this premium as a profit.

The best way to understand options is to compare it with the classical insurance. In case, the certain event doesn’t happen, the insurance company collects premiums from customers. The same logic stands beyond the options market.

Does it mean that you can simply sell options all the time and generate a consistent profit?

Well, you can. But sometimes volatility goes mad and option sellers give everything back the market very quickly.

Fx options

If you consider trying trading Fx options, you would possibly find your niche in swing or position trading (with duration of a trade starting from several days). Considering increased spreads for most option products, intraday trading is not a good idea.

The best value for trading options would be for those traders who consistently make good forecasts, but struggle to find decent entry points.


The “theta” curse

There is a theta parameter, which means that your forecast should not only be valid but also timely. You may be right about the direction, but still lose money on your trade, because your target is not achieved as quickly as needed. When you purchase the option, you go “short theta”: the price of your option contract deteriorates over time and may come to zero when the option expires.

So, your forecasting skills must include not only the suggested direction and target area, but also correct timing. That’s not so easy, isn’t it?

Bottom line:

I want to finish this article with the words of Bruce Lee who had said: “Don’t pray for an easy life, pray for strength to endure a difficult one”.

Literally, that means, that there are no “easy” markets. Even cryptocurrencies, which provided “easy money” in 2017, are not so “easy” at the moment.

So, if you consider making a “transition”, give yourself time to master the market which you already trade. Maybe, it’s time to shift to another time frame or a strategy?

If you ask me, I think that today, there are no specific “Forex traders” of “Futures traders”, or even “Crypto traders”. You should have the solid foundation which would help you successfully trade all markets if needed.

Trading the financial markets is associated with increased level of risk. Past performance is not indicative of future results. All materials are provided for educational purposes only and by no means may serve as a trading or investment advice.

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