In This Episode
- The type of charts that Walter has a hard time trading
- How to Make Money in Stocks – William O'Neil
- Why we both like Forex better
FX vx Stocks
Every trading market has its upsides and downsides. The best market for you to trade will depend on how well those traits align with your personality.
In this episode, we talk about the nuances of the stock and Forex market and which types of people are more likely to be successful in each one.
Read the Transcript:
Walter: Hi Hugh. So I got a question from a trader. He's been trading indices and shares for a long time. He was saying that when he tried to move over to currencies, he found it difficult. He was wondering why is it that he finds it difficult moving over? I had some ideas on that but what were some of your thoughts?
Hugh: I think it's just a different psychology. I think Forex and maybe futures kind of have a similar psychology. And then you get stocks, indices and maybe even options that have a slightly different psychology behind them. It seems like if you're a stock trader you can find value going long.
You're looking for those companies that are really undervalued or they're going to have a new product coming out or something like that. You can look at the fundamentals and really leave it at that and then for the penny stocks, if you find like those scam companies and you know that they're no good but they take off then you can just short them.
There's a different psychology behind that compared to Forex or maybe even futures. What do you think?
Walter: I think probably the biggest thing is, what you touched on is like when you look at shares, so when I started trading in the nineties, we learned from this guy named William O'Neil. Who wrote a book How to Make Money in Stocks. I think it's something like that. We could put it in the show notes.
He came up with the Investors Business Daily which he thought was a more technical based newspaper rather than like the Wall Street Journal. Which was kind of like the go-to thing in the States at the time. Other countries have different papers. So he was talking about earnings per share, relative strength and things like that.
We would get the charts every week called Daily Graphs and they're like these phone books. Sometimes five of them will come every week and we could pour through them and look at the charts and find out if there's any cup and handle. Which is what William O'Neil talked about in this book.
Anyway here's the thing, we were only looking for shares to buy and this is also like in the Dotcom Bubble two like from ninety-four to ninety-nine. So we were only looking to buy, there was a really hardcore rising market. Especially towards the end of that like ninety-seven, ninety-eight.
There was a lot going on then and I remember you know buying stocks like Netscape, Gateway 2000 which made computers. All these like AOL, really like these darling companies at the time. When you think about it, a couple of things are interesting about that. We were only buying.
So when you're a currency trader automatically, you have to look at things a little bit differently. I would even argue more than that. It's a little bit different to futures traders because futures traders like I remember when oil fell earlier this year in 2020 — early in 2020 I think it was. I don't think it was late 2019. It was late 2020 — oil fell really hard, and everyone was saying it was the death of oil but the thing is, oil does have some intrinsic value.
It can't go to zero-sense. Do you know what I mean? I suppose a company could. If a company is totally bankrupt and they're toast then the shares will go really low but before that they'll actually de-list it. They’ll take it off the major exchange and then move it to another.
I remember I had a stock. I know this because I had a stock. There's no internet or anything. I called my broker. I'm like, “Where's the stock? I can't find the quote in the paper.” He's like, “Well, it's gone to the” — I think he called it the note board or something about the board, some sort of board. — I'm like, “What's the note board?” or whatever. He goes, “That's where stocks go to die. Awesome, my stock's going to die.
I guess the biggest thing is when you're trading Forex, you're always trading one relative to the other. So you can look at the Pound, Aussie chart or you can look at the Aussie, Pound chart. There are actually some charts that you can find. We can post in the show notes where you actually, you know it's the opposite. It's not the Euro, USD. It's the USD, Euro.
It's really kind of hard to wrap your head around that. So inherently, currency pairs are range bound.
Hugh: Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.
At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.
So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.
Walter: Now it doesn't seem like that because we still can trade with leverage with Forex even if they're trying to take that away from us. There still is a range of a high and a low for the Euro. Which the Euro/USD, it's about from you know it's been about seventy-seven cents to the Euro to about a dollar sixty-one I think, around there. So it's basically been caught in that range since the inception of the Euro and every currency pair kind of has that range.
It's a little bit different from say, gold because some people right now if you talk to them they'll say, “Gold is going to go to ten thousand dollars”. Well, it hasn't really been ten thousand dollars in modern times. We don't have a chart that goes back that shows gold being worth that much but it could. It could go to a hundred thousand or two hundred thousand. Same with bitcoin and everything else.
Whereas with currencies, it's a little I mean, that could certainly happen but that would mean that one of the currencies is basically in the toilet. It is done and they're going to have to reset that currency. So it does take a little bit of a different approach. You really have to, you almost have to consider twice as many decisions because you're thinking of buying or selling.
Whereas a lot of times, there are a lot of share traders and index traders that just buy. I suppose index traders are a little bit different because they could buy and sell. Certainly, futures traders can also sell but they definitely have a buy bias that you don't necessarily have to have as a currency trader. The leverage thing too. If you haven't traded futures before, that can be a bit tricky to get your head around.
It was for me. I remember when I was first getting into you know, getting out of share trading and getting into this, I had to talk to a futures broker on the phone. He was sending me stuff so that I could understand you know what this margin thing and all that. We actually traded shares on margin. We were able to do that but it wasn't the level that you get in Forex or in futures obviously.
I have no idea what the margin requirements are now in shares but we couldn't get that much you know, the interest in all that.
Hugh: I remember I had a small futures account once and I could only take one trade at a time.
Walter: Yeah and that's why you know some of the Ryan Jones method of fixed ratio trading like, that's where that comes from because it's like the question was: How do we grow our account quickly? When we can only trade, do you know what I mean? You're kind of stuck with these fixed lot sizes.
Hugh: Yeah.
Walter: Yeah, that's where all that stuff comes from. It is from that sort of approach. It's really lucky I think and fortunate if you're a currency trader that you can get fine lot distinctions and you can get smaller lot sizes because that makes a big difference over time.
Of course, if you map it out, you can see that it makes a huge difference over time. If you're able to get precisely two percent risk or precisely one-point-five percent risk or whatever your risk amount is. It's a bigger deal for sure because future traders can't do that obviously especially with smaller accounts.
Hugh: Yeah, totally. I think if you look at the mechanics of the different markets too. When you dig into it like the stock market, like if you have a retirement account you can only go long. Stuff like that and then you have the pattern day trader rule which really kind of limits people. If you want to go short then you have to be able to borrow the shares. Which means you have to find it somewhere.
Same thing as the futures markets where it can get locked. Limit out, limit down. So there's all kinds of different mechanics behind it. Whereas, the futures market I mean, the Forex market is pretty wide open. You can go long and short pretty easily both ways.
Walter: Yes and outside of the States, you can trade CFDs. Contracts For Difference, which is like in the UK, in Australia we have these. Where it's like the major shares like Tesla or Apple or whatever. You can trade like it's actually the same as Forex really. Where you're trading like a mirror of the market.
In Forex we're trading these charts that aren't you know our broker passes the trade through to the real currency market, the real inter-bank currency market and it's the same thing with these CFDs. So you can actually trade smaller lot sizes and stuff like Tesla or Apple or you know the major, the big shares that are traded like Microsoft and stuff like that.
So that's another thing that you can do if you move over to sort of like the Forex world. It takes a bit I think of mental flexibility once you go over to currency trading. I understand people say it's harder but it depends on what you consider to be harder. I think it's harder to trade really gappy charts. That is really the main reason why I like currency.
I really do. I mean it used to be like probably like most people because you like to have charts going after work or whatever so you can trade you know when you get home or early in the morning before you go to work or something like that.The thing that I really hate is having a trade on and then the market gaps over you know your stop or your price. Do you know what I mean? All that stuff to me, that is a lot of risk there. Now I understand currencies definitely do gap as well.
The technical analysis side of trading is so much easier when you have these really smooth charts. Which you typically get you know these candles that you get in Forex and that's what I really like about it to be honest. I've looked at Australian companies, Australian shares and they're so gappy. The market's only open here for like four hours or something. It's crazy.
You get these massive gaps and you know what it looks like? It looks like target practice. It looks like someone just took a gun and just shot it. You're like, “Whoa! So it opened here today and then tomorrow it opens up here”. It's crazy, you know. I really like the smooth charts that you get in currency. That to me, that's another thing that I think you know might be weird if you're coming over from shares and you're so used to that.
It just depends. With anything though, practice is what it's going to take and you know working through a simulator, getting your feet wet, getting your confidence up, all the sort of fundamentals of trading that's the way to go for sure.
Hugh: Back testing is really tough with the shares too, so many data sets. It's kind of crazy.
Walter: You need a lot of data, that's right. Actually, one of the guys in the forum was showing me one that I didn't even realize. I didn't even hear about it but he uses this in his share trading and it looks you know it looks very similar to Forex Tester but you're right. I mean, your data has to be really good no matter what if you want to get some good idea of how your strategies are going to work for sure.
Hugh: All right, cool. Thanks, Walter.
Walter: See you.
Hugh: All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.
Enter the Monthly Contest
We give away a trading prize every month, so be sure to enter to win.
You can win by doing one or more of the following:
Each action counts for one entry in the month that it was posted. We will pick a winner at random from the entries that month.
The giveaways can include books, coaching sessions, trading tools, or surprise gifts.
Click Here to Suggest a Podcast Topic
Listen to the Audio Version
Click the play button below to hear the audio-only version. You can also download the mp3 file below.
Podcast: Play in new window | Download
How to Get New Episodes of The Think Profit Podcast
You can get notified of new episodes of the podcast by subscribing to our email list, or subscribing via any of the major podcast platforms that can be found here.
If you enjoyed this episode, a 5-star review on your favorite podcast platform is always greatly appreciated!
Thanks for listening and we hope that your trading is going well!
