Do you guys find that forex trading sucks?

erock,

There are lots of (maybe obvious) reasons why equity price charts and forex price charts should, and do, present very different patterns. For example:

 

1. With stocks, you have the valuation, and fundamentals, of only one entity to consider, e.g. MSFT. Whereas a quoted forex ‘price’ is effectively a comparative ratio of two different national economies, e.g. EURUSD = EUR and USD.

1. It’s because of this that there’s less structural bias to the forex markets. For example, ‘buying’ EURUSD is the same as ‘selling’ USDEUR. In marked contrast, stock prices seem to rise slowly, and fall quickly (supposedly fear is a bigger motivator than greed ).

1. The forces that drive the forex market are more complex. One example is the need to constantly maintain triangular equilibrium, e.g. GBPJPY must always be equal to GBPUSD x USDJPY.

1. Unlike the stock markets, (spot) forex is not a centralized exchange. Its market structure is much more complex. Consequently, it’s necessary to interpret volume in a forex chart differently to that presented in a stock price chart.

1. Forex is a continuous 24 hour market. In marked contrast, stock charts have overnight gaps and islands, i.e. different patterns.

1. Whereas stock markets attract almost exclusively participants with speculative agendas, forex includes commercials whose agendas may be largely non-speculative.

1. Forex markets are impacted by scheduled news announcements, which can cause intraday spikes that can trigger your stoplosses.

1. The forex markets operate around three different banking sessions, and each has its own effect on volatility. For example, the USDCAD pair is more likely to move further in the US session than during the Asian session.

1. The forex market offers greater overall liquidity.

1. The forex markets are manipulated (by heavyweight players) in a qualitatively different way to the stock markets.

1. If I may generalize, forex tends to revert to a mean more often. One possible reason for longer term mean reversion is central bank intervention to restore the balance between disparate national economies. A good example was the intervention of the SNB back in August.

No doubt there are many other reasons that I’m unaware of.

Again, if I may generalize, forex is a faster moving market, especially intraday. Indicators like RSI and MACD that were designed to provide good signals for timing entries (and exits) when trading stocks do not necessarily work as well with forex. IMO, the forex markets work more heavily around a support/resistance model. Build a robust system around rejection of key S/R levels, and/or 'orderflow' patterns, and you can make extremely accurate entries that allow for high RR trades. There are forex traders who claim to be averaging in the ballpark of 10% ROE per week, and I have seen enough to satisfy myself that such returns are possible. However, if you want to undertake a career in forex, be prepared for a steep learning curve. Take heart, then, your observation that forex is a more difficult nut to crack is most likely very accurate.

Compliments of the season to you,
David

Man, I think you really nailed it right there. I would also add that trading around this model is, in my opinion, MUCH more difficult than trading around a typical trend/momentum following model. With the latter, you can rely more heavily on indicators, and shift a lot of the decision making process to those indicators. This takes a huge load off the trader and is I think inherently easier when you can wait for "confirmation" before entering a trade. Trading S/R is a much more reactive style of trading, and requires a certain "leap of faith" mentality, where the emphasis is more on YOU the trader: your discipline, your control, your conviction. Self doubt becomes a much greater enemy then.

Hanover

Excellent post. As a relative newbie to forex your points really resonate with me.

The full meaning of your first dot point about forex prices being a comparative ratio and the complexity it generates for analysis in my opinion is not fully appreciated by most forex traders. This is why FA in forex is so difficult as compared to the stock market. You have to try to interpret the impact of events on two entities (economies) and the relative weighting on each entity to try to forecast a net impact on the currency pair. Impossible? Maybe, but certainly a lot more complex than most fully appreciate, especially when you add cross rates and "triangular" equilibrium as you put it.

As your last dot point touches on, the role of governments in defending their currency or attacking others is another layer of complexity in forex markets. Thanks again.

Just as long as governments don't control the exchange itself. Yes, they can influence valuations but I don't see how they can control it. They control everything else; the brokers, the retail arena, and whatever else they can find. At least Ol' Barney boy is retiring knowing he had no chance of winning in the coming election. What a trail of destruction he left behind. No hedging, must FIFO, reducing margin, and more. I thought I could get an overseas account but although it's not illegal, no bank wants to contend with the Federales de U.S..

If I may add to this. Forex markets are, to a certain extent, subject to purchasing power parity. When the prices of the Big Mac differ too much, cost minimizing agents would want to engage in trade. This trade comes with demand and supply of certain currencies, and has an upward pressure on the fundamentally undervalued exchange rate and vice versa, thus leading to some mean reversion.