Difference Between Forex Market and Other Markets
August 30, 2016
Forex market is one of the most competitive if not the most competitive financial markets to be traded and there are multiple reasons for this.
Firstly, it is opened around the clock, 24/5, from Monday to Friday, and this tells much about the in-depth analysis needed in order to trade this market competitively.
Even though it is closed during the weekend, many times geopolitical or other risk events happen Saturdays and Sundays and the early market opening is influenced on Monday as gaps are frequent in this situation.
Secondly, forex trading is influenced by so many fundamental variables that no other market can even compare with this degree of complexity.
Forex Market vs. Stock Market
Take the stock market for a change. The first thing to do here is to split the overall stock market interpretation in two: trading stock indexes and individual companies.
What moves the forex market when it comes to fundamental news and economic releases usually moves the stock indexes as well. For example, stocks will react to NFP (Non-Farm Payrolls) release as much as the forex market does and there are multiple currency pairs that move in a correlated manner with stock indexes (for example, there were times when USDJPY and DJIA moved almost with a one hundred percent correlation degree or the DAX in Germany was inversely correlated with the EURUSD for a period of time after the ECB slashed rated in the negative territory).
However, when it comes to trading individual companies, things differ very much compared with trading a specific currency pair.The stock price of an individual company moves less on the macroeconomic news and more on internal news. The earnings calendar is a must for traders involved in individual stock trading as earnings/share, EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) and earnings/share as well.
Moreover, dividend information plays an important role in the price of any individual stock as traders have the tendency to upload a stock before dividend date and drop it shortly after.
Mergers and acquisitions play an important role when it comes to stock market trading and this is something that has no influence on the overall forex market. When an acquisition is announced, the natural reaction is that the company that is acquired will enjoy a rise in the stock price while the one that is making the acquisition will suffer initially.
This has nothing to do with any macroeconomic data or overall economic data in the country, but with a very specific piece of information regarding a specific transaction.
Another important difference between the stock market and the forex one is the fact that the former almost always opens with a gap the very next trading day. This is not possible on the forex market except for Monday opening.
Because of this, gaps should be treated and interpreted differently on the two markets as on the stock market they are pretty much irrelevant due to the fact that they appear so often.
Last but not least, liquidity is an issue for the stock market, both on an individual stock as well as on an index, while the forex market is the most liquid financial market in the world with trillions of dollars changing hands on a daily basis.
All in all, one can say that while there are certainly some similitudes between stock and forex trading, overall they should be seen as distinct markets with very different trading strategies and expectations.