Long vs Short Positions in Forex Trading

Learn the basics of forex trading positions, including how and when to go long or short on currency pairs. With trading examples and charts.

TOP 5 DIFFERENCES BETWEEN FOREX AND STOCKS

The table below summarizes a few key differences between the forex market and the stock market:

Let’s take a more in-depth look into how exactly the forex market compares with equities (stocks).

1. Volume

One of the biggest differences between forex and stocks is the sheer size of the forex market. Forex is estimated to trade around $5 trillion a day, with most trading concentrated on a few major pairs like the EUR/USD, USD/JPY, GBP/USD and AUD/USD. The forex market volume dwarfs the dollar volume of all the world’s stock markets combined, which average roughly $200 billion per day.

Having such a large trading volume can bring many advantages to traders. High volume means traders can typically get their orders executed more easily and closer to the prices they want. While all markets are prone to gaps, having more liquidity at each pricing point better equips traders to enter and exit the market.

2. Liquidity

A market that trades in high volume generally has high liquidity. Liquidity leads to tighter spreads and lower transaction costs. Forex major pairs typically have extremely low spreads and transactions costs when compared to stocks and this is one of the major advantages of trading the forex market versus trading the stock market. Read more on the differences in liquidity between the forex and stock market.

3. 24 Hours Market

Forex is an over the counter market meaning that it is not transacted over a traditional exchange. Trading is facilitated through the interbank market. This means that trading can go on all around the world during different countries business hours and trading sessions. Therefore, the forex trader has access to trading virtually 24 hours a day, 5 days a week.

Major stock indices on the other hand, trade at different times and are affected by different variables. Visit the Major Indices page to find out more about trading these markets-including information on trading hours.

4. Minimal or no Commission

Most forex brokers charge no commission, instead they make their margin on the spread – which is the difference between the buy price and the sell price. When trading equities (stocks) or a futures contract, or a major index like the S&P 500, often traders must pay the spread along with a commission to a broker.

Forex spreads are quite transparent compared to costs of trading other contracts. Below you will see the spread of the EUR/USD highlighted inside of the executable dealing rates. The spread can be used to calculate the cost for your position size upfront prior to execution.

5. Narrow focus vs wide focus

There are eight major currencies traders can focus on, while in the stock universe there are thousands. With only eight economies to focus on and since forex is traded in pairs, traders will look for diverging and converging trends between the currencies to match up a forex pair to trade. Eight currencies are easier to keep an eye on than thousands of stocks.

The variables that effect the major currencies can be easily monitored using an economic calendar.

SHOULD YOU TRADE FOREX OR STOCKS?

Whether you choose to trade forex or stocks depends greatly on your goals and preferred trading style. The table below shows different types of trading styles, including the pros and cons of each when trading forex and stocks.

If you are new to trading forex download our free forex for beginners guide. We also provide free equities forecasts to support stock market trading.