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Why the stock market is the easiest market to trade

  • #1
  • First Post: Edited 6:31am Oct 2, 2013 6:02am | Edited 6:31am
Hello,

I want to discuss why stocks are easier to trade than forex or other derivates. Please spare me with pseudo-forex-advantages like 24h market (no one trades 24 hours; beside that the market is volatile only in certain times), smaller trading universe (actually I prefer a lot of charts...), bigger market (who cares?), smaller fees (every looked at the commissions of IB?) and liquidity (look at apple, google and co. here you have more liquidity you can dream off...).

I claim that stock markets are easier to trade for following reasons:
1. The market has a general upwards drift. You could buy-hold and eventually will turn a profit. Not so in forex or other derivates (e.g. see indices worldwide over the past 50 years - that's not a coincidence) - Anyone knows why???
2. It's not a zero-sum game in the sense that someone has to loose, whenever I turn a profit. Naturally this means that there's less competition. It's a universal truth, that less competition means more profit potential. The consequence: There's a higher possibility for the constitution of a situation where everyone has the same interest, making it easier to trade the market.
3. Being a smaller entity a company is much easier to analyze compared to an entire country. What's even more important is that people find a consensus much easier about the fundamental strength of a company (which affects the stock price). For example, take the EUR/USD. Good news from the EU and good news from the states. It's in the trader's perception which news is better, ultimately influencing the price. However, good news (or outlook, if longterm) for companies can be interpretet only in one way. Right, good for company; ... which equals good for the stock (in the long term).

I think what it comes down to, is that in stock markets there's a stronger consensus about what's good for a company and what's bad for a company (a company is easier to analyze in a whole, there're more information and so on...). This makes stocks more predictable in comparison to commodities, forex or futures... (being a non zero-sum game there isn't a conflict in interest as well; thus everyone can profit). This is the reason, why stock markets are easier to trade. If you disagree or feel to comment I encourage you to do so.

-mike
I'm getting there ... slowly
  • #2
  • Oct 2, 2013 7:31am Oct 2, 2013 7:31am
there is lots of manipulation in stocks.

this is my reason to trade fx
been there done that, Good Bye
  • #3
  • Oct 2, 2013 7:33am Oct 2, 2013 7:33am
btw fx is toughest and biggest one, so if I can trade fx then I can trade any thing.
been there done that, Good Bye
  • #4
  • Oct 2, 2013 8:56am Oct 2, 2013 8:56am
Quoting miketoll
Please spare me with pseudo-forex-advantages like 24h market (no one trades 24 hours; beside that the market is volatile only in certain times),
24h market means no gaps with exception of week-ends (very rarely big gaps even in week-ends) which means I can know exactly how much I risk.
My profits from forex comes from technical analysis, more exactly from support or resistance (I only pay attention to big news and I don't trade before them, for instance I don't trade before NFP), in stocks it's difficult to analyse the chart on 4hr and on daily (my favourite time frames) because of the gaps.
I don't always risk only a small % because I don't lose often with my strategy (I'm a picky trader), sometimes I risk 10%. This is impossible to do on stocks because the margin is much bigger (50%), even on CFD is 5% or 10% compared to 1% in forex.
Even if the leverage was bigger because of gaps I still won't know if I risk 10% or maybe 20% (I actually think the small % risk that it's recommended in forex has been made by former stock traders). Even if I risk only a small % I still don't like to deposit all my money so leverage still helps.
I agree with you at the huge number of stocks compared to forex, if they wouldn't have gaps I wouldn't trade forex anymore.
  • #5
  • Oct 2, 2013 9:50am Oct 2, 2013 9:50am
Quoting miketoll
Hello, I want to discuss why stocks are easier to trade than forex or other derivates. Please spare me with pseudo-forex-advantages like 24h market (no one trades 24 hours; beside that the market is volatile only in certain times), smaller trading universe (actually I prefer a lot of charts...), bigger market (who cares?), smaller fees (every looked at the commissions of IB?) and liquidity (look at apple, google and co. here you have more liquidity you can dream off...). I claim that stock markets are easier to trade for following reasons: 1. The...
Whew, this is quite a topic! Forex vs stocks - 2 markets with many similarities and differences.

1. Is stock trading really not a zero sum game? Consider that all companies will eventually die and their stocks will be worth zero. The name of the game is therefore to not be left holding the bag. Last person holding on gets to lose all the capital profit that all the previous owners made.

2. That upward-sloping curve you mentioned is a fallacy. Examine the Nasdaq index from its peak in 2000 until now, 13 years later. The Dow Jones index contains just one of the original stocks when it was created and the index is constantly being changed to include new stocks and eliminate old stocks based on their market cap. That upward sloping index is not the same portfolio today as it was 10, 20 or 100 years ago. What happened to all the old components? Most no longer exist.

3. Buy and hold does not guarantee you any profit. What happened to the long-term holders of Enron and WorldCom, Bear Sterns, Lehman etc. there have been thousands of stocks that reached zero. How many stocks went bust during the dotcom bubble?

4. You mention less competition. Competition by whom? The forex market is dominated by relatively few players and I will bet that there are more small players on the stock market hence more competition not less. If you are referring to competition amongst companies, well there is huge amount from all over the world. If a company cannot compete with China for manufacturing costs then it is doomed - risky, eh?

5. There is a lot of manipulation of stocks by derivatives players who have a clear conflict of interest by for example manipulating stock prices so as to keep option premiums for options they have written , not to mention insider trading. By the time you as a member of the public receive the news about a company there is a good chance it has already been discounted. Your difficulty is to determine whether the news has in fact been discounted or whether the price will still react to the news.

6. Good fundamental news on a company does not always mean that the stock price will rise. If PE ratios were fixed then maybe this would be mostly true but PEs vary from below 10 up to the hundreds. The PE of the SP500 was about 40 in 2007 if my memory is correct. Would you buy an index when stocks are this kind of PE even if the graph slopes upward? Who was buying the big cap stocks at this time? Not the small traders because they couldn't afford them, it was the big boys, the so-called "value" searchers!

7. Stock prices are no more predictable than any other asset price. Neither fundamental nor technical analysis can predict future prices. And don't forget about news surprises.

8. I believe that in some ways stocks are easier to make money with and that is because if you don't buy stocks on margin you cannot be forced to liquidate your position. This does not mean that you cannot lose money but you will not lose all you invested unless you hold on too long. At least you get some time to react. On the other hand the forex market is very highly leveraged with the result that very small moves can wipe out a small trader. Forex is also a market that reacts violently at news times and this makes it difficult to trade it.

9. It is just as easy to analyse a country as it is to analyse a company. One just concentrates on macro-economic factors e.g. interest rates, GDP, trade balance

10. It really doesn't matter which asset or asset class you invest/trade, none are particularly easy. Look what has happened to house prices in the USA since 2008 yet we were all told that we couldn't lose in the housing market, it would just go up and up and up.
  • #6
  • Edited 10:11am Oct 2, 2013 10:00am | Edited 10:11am
You can't say the stock market has a long term upward drift and then say you can buy and hold, when in your title you are talking about the easiest market to trade. Trading is not investing. They are two separate things.

The stock market is a zero sum game. One person wins and one person loses. The forex market is the most liquid and therefore has the largest players and for this reason is more competitive than the stock market. The average person will almost always lose in Forex if they don't have a clue especially since most people start with a few hundred or a couple thousand dollars and trade against their brokers (since the forex market is not centrally located), where as in the stock market, provided you trade a liquid stock you can trade against some sucker, rather than a dealer/market maker.

To say technical analysis and fundamental analysis does not work is just plain wrong. I personally know of a 1 billion dollar money management firm that manages money (long term investing) with a quantitative fundamental strategy and I have utilize their strategy to manage my retirement accounts for a decade. I personally have traded for a living since 2002 using a technical trading strategy I designed. Most "classical" technical analysis no longer works because too many people are trying to use the same worthless strategies and the herd always loses.

People need to stop just regurgitating what they read online. Most people have no clue about how to make money in the market. This includes the so called guru's that try to sell their alert services.
  • #7
  • Oct 2, 2013 11:07am Oct 2, 2013 11:07am
Quoting Ttop
{quote} 8. I believe that in some ways stocks are easier to make money with and that is because if you don't buy stocks on margin you cannot be forced to liquidate your position. This does not mean that you cannot lose money but you will not lose all you invested unless you hold on too long. At least you get some time to react. On the other hand the forex market is very highly leveraged with the result that very small moves can wipe out a small trader. Forex is also a market that reacts violently at news times and this makes it difficult to trade...
If someone loses all his money in forex in one trade he is not a trader he is a gambler. Leverage has many advantages (you can risk a higher % if you use kelly criterion) but if you risk 100% of your money you have no chances of success.
  • #8
  • Oct 2, 2013 11:12am Oct 2, 2013 11:12am
Quoting dr0832
To say technical analysis and fundamental analysis does not work is just plain wrong. I personally know of a 1 billion dollar money management firm that manages money (long term investing) with a quantitative fundamental strategy and I have utilize their strategy to manage my retirement accounts for a decade. I personally have traded for a living since 2002 using a technical trading strategy I designed. Most "classical" technical analysis no longer works because too many people are trying to use the same worthless strategies and the herd always...
Classical technical analysis works very well. I trade very important levels of support and resistance (notice that I said very important not important) that have space to run (if I don't have space I don't trade) with pin bars or fake outs confirmation (I also blend candles so I don't play only single bars) and it works very well.
  • #9
  • Oct 2, 2013 11:33am Oct 2, 2013 11:33am
Quoting WhiteHorse
there is lots of manipulation in stocks. this is my reason to trade fx
And what do you call multilateral government intervention in currencies other than manipulation?
  • #10
  • Oct 2, 2013 11:59am Oct 2, 2013 11:59am
one thing that is not mentioned yet is structure of the market. Stocks are not mostly traded via vwap by large institutionals. And then there are stat arb guys, and then hfts. All these systematic methods of trading makes the price moves quite efficient. Gone are the days when Fidelity of the world called bank's desk to sell 100,000 IBM shares (then bank's trader tried to hedge on exchange manually thus creating thrusts in the price). Now they put in a day/multi day vwap order that splits those shares in 1000s of pieces and so you cant detect this in the price action (HFTs try to do that and were successful at first but now that area is also in equilibrium).

In 1990s you could have simple technical systems (even ma crossover etc) that would make a lot of money. not anymore in stock markets.

In fx, this transformation is still in progress. While a substantial amount of market making is being done by algos at banks, there is still a lot of manual trading (by clients and at banks) which means the effects of their action can be seen in charts easily.

Based on just this market structure change, i can say technical trading is easier in FX.
Think : Trade : Live Life
  • #11
  • Oct 2, 2013 1:35pm Oct 2, 2013 1:35pm
Quoting Ttop
{quote} Whew, this is quite a topic! Forex vs stocks - 2 markets with many similarities and differences.
1. Is stock trading really not a zero sum game? Consider that all companies will eventually die and their stocks will be worth zero. The name of the game is therefore to not be left holding the bag. Last person holding on gets to lose all the capital profit that all the previous owners made.
Tell me one thing: Do you consider a car manufacturer part of a zero-sum-game? What if no one wants to buy the car anymore? If so, then it would basically be the same scenario as you mentioned. But you know that a car manufacturing is not a zero sum game, as value is created. Like companies not paying out dividends, but reinvesting the money. Stock price rise, because the company gains value/grows, and as a stockholder you own a part of the company. Zero-Sum game is not about the last one not being able to sell his position, but if someone is winning, while at THE SAME time someone is loosing.

2. That upward-sloping curve you mentioned is a fallacy. Examine the Nasdaq index from its peak in 2000 until now, 13 years later. The Dow Jones index contains just one of the original stocks when it was created and the index is constantly being changed to include new stocks and eliminate old stocks based on their market cap. That upward sloping index is not the same portfolio today as it was 10, 20 or 100 years ago. What happened to all the old components? Most no longer exist.
Let me put it this way. Stocks do naturally go up. Simply because the stock price is tied to the companies value. Assuming you invest in solid and prospective companies, the stock will go up. Of course, macros can override that trend, but the general upwards drift is there.

3. Buy and hold does not guarantee you any profit. What happened to the long-term holders of Enron and WorldCom, Bear Sterns, Lehman etc. there have been thousands of stocks that reached zero. How many stocks went bust during the dotcom bubble?
Absolutely true. However, with risk control it wouldn't mind....

4. You mention less competition. Competition by whom? The forex market is dominated by relatively few players and I will bet that there are more small players on the stock market hence more competition not less. If you are referring to competition amongst companies, well there is huge amount from all over the world. If a company cannot compete with China for manufacturing costs then it is doomed - risky, eh?
Competition in the sense of someone wants to drive the price lower. If everyone wants to buy, it's not on the expense on someone else (thus there's the POSSIBILITY for a common interest, namely everyone is happy when prices go up; there's noone who may try to push the price in the opposite direction). In forex when someone buys, AT THE SAME TIME someone looses. This is a conflict in interest (forex doesn't offer a situation, where EVERYONE can win at the same time; big, big disadvantage which makes trading a struggle between these two parties). The buyer may do everything to pull the price higher and the seller will do everything to push prices lower. See the conflict?

5. There is a lot of manipulation of stocks by derivatives players who have a clear conflict of interest by for example manipulating stock prices so as to keep option premiums for options they have written , not to mention insider trading. By the time you as a member of the public receive the news about a company there is a good chance it has already been discounted. Your difficulty is to determine whether the news has in fact been discounted or whether the price will still react to the news.
What do you mean with manipulation? Is that bad? Let's say a stock is solid and has a good outlook. You buy it and a big investor manipultes the stock to the upside! Isn't that great? You both win (this is the the beauty of stocks - see point 4)

6. Good fundamental news on a company does not always mean that the stock price will rise. If PE ratios were fixed then maybe this would be mostly true but PEs vary from below 10 up to the hundreds. The PE of the SP500 was about 40 in 2007 if my memory is correct. Would you buy an index when stocks are this kind of PE even if the graph slopes upward? Who was buying the big cap stocks at this time? Not the small traders because they couldn't afford them, it was the big boys, the so-called "value" searchers!
That's true. But well growing companies are usually perceived as good investments/trading opportunities, generating a aura of buying, as LONG AS THE MARKET IS STABLE (crises/other macros certainly are stronger).

7. Stock prices are no more predictable than any other asset price. Neither fundamental nor technical analysis can predict future prices. And don't forget about news surprises.
I think they are. A fundamentally growing company (neglecting short term swings by news & macro influence) is driving its stock prices higher. Simply as that. The market just has to be stable and not in a big crises (which are rare btw. 1930, 2000, 2008/2009) which in is really not too difficult to find out, don't you think so?

8. I believe that in some ways stocks are easier to make money with and that is because if you don't buy stocks on margin you cannot be forced to liquidate your position. This does not mean that you cannot lose money but you will not lose all you invested unless you hold on too long. At least you get some time to react. On the other hand the forex market is very highly leveraged with the result that very small moves can wipe out a small trader. Forex is also a market that reacts violently at news times and this makes it difficult to trade it.
9. It is just as easy to analyse a country as it is to analyse a company. One just concentrates on macro-economic factors e.g. interest rates, GDP, trade balance

You only see the surface of the information available. Macro-economic factors like interest rates, GDP, ... only affect price for a very short time (news spikes), like news for stocks. But the real fundamentals are much harder to analyze, especially due to the fact that you have to gauge two countries against each other. Who tells you that the good news of currency A is better than the good news of currency B? However, I can tell you that a company with a strong fundamental background will be perceived as a good investment/trade possibilty by EVERYONE.

10. It really doesn't matter which asset or asset class you invest/trade, none are particularly easy. Look what has happened to house prices in the USA since 2008 yet we were all told that we couldn't lose in the housing market, it would just go up and up and up.
A tight stop would have settled the problem... It's just another example how much easier stocks are to trade. You could have profitet increadibly by the rise and limited the risk by a tight stop. Too bad, it's simply not too common in stocks to trade/invest with stops...
I'm getting there ... slowly
  • #12
  • Oct 2, 2013 1:38pm Oct 2, 2013 1:38pm
Quoting dr0832
The stock market is a zero sum game. One person wins and one person loses.
Sorry, but this is fundamentally wrong, unless you consider every transaction as a zero-sum game (see above). Is producing a car & selling it a zero sum game?
I'm getting there ... slowly
  • #13
  • Oct 4, 2013 9:52am Oct 4, 2013 9:52am
I started out trading retail spot forex, but over the past 3-4 years I've moved over to stocks, futures and options more and more. So I have some practical experience trading both markets.

I think it's hard to generalise. I personally find stocks easier to trade, but I'm sure others find the reverse. The most important thing is having a strategy that gives you a statistical edge, no matter what you trade. That's really the hard bit. And once you have a strategy that works, it has to be worked on to continually improve it and modify it as price action changes over time. Takes a lot of work and discipline, and reviewing countless charts each day. That's what I spend most of my time doing.

Both markets are manipulated - by that I mean, big players move the price in a certain direction, before revealing their true bias. I don't think it's a big issue though. As a small retail trader the idea is to ride that volatility, and be ready to get out or reverse when you have too.

In general it's hard for manipulation to occur during high volume times of the day because more money's required to do it. So with US stocks, it's easier to manipulate the price for smaller cap stocks, in quieter periods of the day i.e. 12 to 2PM EST, rather than the first 2 hours of the trading day.

Large cap stocks are a different beast. While their volume is high, and manipulation is more difficult, Algo trading can cause some amazing moves where certain price levels are hit. You see that on AAPL quite often.

Right now I'm predominately trading the E-Mini (ES) futures contract. It's the highest volume futures contract in the world, and has it's own unique way of moving. I'm slowly getting better at trading it. It definitely reacts around support/resistance levels, especially pivots and previous day high/lows. It can trend aggressively and reverse aggressively. It challenging to trade, but rewarding if you can do it. Many people make a good living just trading this thing, but it's not easy. The liquidity is amazing.

Forex. I personally struggled trading it, but that may be because of my own limitations as a trader. News trading is pretty easy (assuming you have a broker than fills), but I struggled with forex technical trading. I found that support/resistance levels didn't hold up as much as they do with stocks, and erratic moves were more frequent.
  • #14
  • Oct 4, 2013 11:49am Oct 4, 2013 11:49am
forex is harder because itīs more efficient
  • #15
  • Oct 5, 2013 3:37am Oct 5, 2013 3:37am
Quoting Myo
forex is harder because itīs more efficient
I disagree with you. I think that both are inefficient to some extent. The only reason people think that Forex is efficient is because they think that it is difficult to properly analyse the factors that drive price, which are macro-economic in nature. Hence, they falsely believe that the current price may reflect all current opinions and analysis. Forex pairs can severely diverge from reality and its equilibrium by heading in one direction for extended periods of time, then they correct in a severe and volatile manner.

Stocks are also inefficient due to the fact that they are much more easier to value, due to their micro economic nature and hence when they diverge from value and head in one direction it is easier to identify the far from equilibrium situation. Valuation methods consist of:

a. Discounted cash-flow analysis to market capitalization;
b. relative valuation depending on the nature of the stock; and
c. sum of parts valuation.

You can't use any of these techniques on Forex. Hence, making it harder and more subjective to value. And with that being said, I don't believe that both markets are inefficient all the time. I believe that they are both inefficient 20 percent at the time, when emotions begin to govern valuations and expectations of future positive microeconomics/macroeconomics come into play. That is when from from reality situations occur and reversion to the mean becomes probable.

Examples to Forex inefficiency include:

-EUR/USD in 2008;
-EUR/USD in June 2010; and
-AUD/USD in August 2011.

Examples to inefficient in stocks:

- The 1999 Dot Com Bubble;
- The 2008 Great Recession; and
- The 2007 Shanghai composite bubble.

It is my duty as an investor to identify these far from equilibrium situations and invest them vigorously when they occur. It is also not my duty as an investor to forecast when these situations will occur, it is however my duty to realize when they occur to assert contrarianism.
  • #16
  • Oct 5, 2013 11:38am Oct 5, 2013 11:38am
Quoting WhiteHorse
btw fx is toughest and biggest one, so if I can trade fx then I can trade any thing.
FX is far from the toughest market to trade. One of the easiest in fact.
What is any ocean but a multitude of drops?
  • #17
  • Oct 5, 2013 11:38pm Oct 5, 2013 11:38pm
It may be the easiest but I will never trade it.... a flash crash will wipe you out.

By the way - the interest rate products are the most efficient.

efficient has no relation to easiest or hardest to trade
With due respect to all (who might have a different viewpoint).
  • #18
  • Oct 6, 2013 4:56am Oct 6, 2013 4:56am
Quoting split_unit
{quote} I disagree with you. I think that both are inefficient to some extent. The only reason people think that Forex is efficient is because they think that it is difficult to properly analyse the factors that drive price, which are macro-economic in nature. Hence, they falsely believe that the current price may reflect all current opinions and analysis. Forex pairs can severely diverge from reality and its equilibrium by heading in one direction for extended periods of time, then they correct in a severe and volatile manner. Stocks are also inefficient...
There are over 100.000 stocks traded worldwide, yet only a handful of major currency pairs. Where is it easier to spot value opportunities? This is what I mean by "efficient".

Edit: I didnīt read your post yet - too tired atm. Will do later.
  • #19
  • Oct 6, 2013 5:00am Oct 6, 2013 5:00am
Quoting Xhale
{quote} FX is far from the toughest market to trade. One of the easiest in fact.
Then why do most hedge funds play equities?
  • #20
  • Oct 6, 2013 8:41am Oct 6, 2013 8:41am
To my view, both markets have advantages and disatvantages, depends what you want.

Forex is for constitent small profits on regular basis by being disciplined, focused, constitent etc. Don't expect a 100% win over night, do it every day and pile up the fortune step by step.

Stock market on the other hand can give you fast cash and is genereally easier to do. Got 10K? Wanna double them up overnight on some juicy IPO? Go ahead, next day you will have 20K, impossible on forex.
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