If you already have some experience in stock trading, you may be wondering, is additional forex training really necessary for me to become successful as a currency trader? Aren’t they essentially the same? If this is what you believe, then you are wrong. There are significant differences between the two markets and without proper education, you may not be aware of them, causing you to make some costly trading mistakes as you learn through trial and error. What are some of the significant differences between the two markets that you need to be aware of?
- The instruments that you’re trading. When you trade stocks you are dealing with shares of a particular stock. On the other hand, when you trade currencies, you are actually dealing with two currencies or currency pairs. A currency trade involves buying a certain amount of a particular currency and selling the equivalent amount of another one. The easiest way to understand this is to look at it this way. Let’s say you are trading the currency pair USD/EUR or US dollars and Euros. To open a trade, you buy 10,000 Euros. Of course, you will pay for them using the equivalent amount of dollars. When the exchange rate is favorable to you, you will then sell the Euros and get back your dollars, hopefully with a profit.
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- Currency trading is less complex. While there are thousands of stocks that can be traded on the various stock exchanges, there are only a handful of major currencies that are traded on the majority of currency markets, including the US dollar, UK pound, the euro, the Japanese yen, the Canadian dollar and the Swiss franc. These are divided into just a few major currency pairs, including USD/CAD, EUR/USD and GBP/USD, which account for close to 90% of all trades in the markets. A good forex trading training course will teach you what these currencies are and how to trade them most effectively.
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- The amount of leverage available. While both stock and forex traders can avail of leverage from their brokers, the currency trader can enjoy as much as 400:1 on their initial margin deposit while a stock trader would be required to maintain a minimum amount in their trading account before they can avail of leverage. This means that for an initial deposit of $1,000 you can trade up to $400,000 worth of currencies. However, using this much leverage also poses a high level of risk since you can be subject to a margin call if you lose too much money and your account becomes depleted. Forex training can teach you how to use leverage more effectively in your trades so that you can profit from the markets.
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- The strategies used in trading. Since the stock and the currency markets are driven by different forces, you have to craft your trading strategies accordingly. While stock values are driven by market sentiments, currency exchange rates are influenced more by economic and political developments. Forex training will help you determine what the best strategies are for successful trades.
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