What are the Similarities Between Forex Trading and Equities Trading?
As chaps who have cut our teeth in forex day trading, ‘Equities Month’ has been a real gear shift for Tom and me. The sheer volume of research that we are going to have to do if we wish to start trading equities is not surprising, but I have also been struck by the surprising similarity of the messages that we have been receiving from our equities trader guests.
Chris Beauchamp from IG Index was our first guest in Equities Month. Chris made it exceptionally clear that the number one priority of an equities trader, particularly one trading with leverage, is Risk Management and the number one skill is Money Management. This is exactly the same lesson we have had drilled home by the successful forex traders we have interviewed.
More than this, however, it is clear that the entire mindset we are going to have to take into equities trading closely mirrors that of the forex day or swing trader. Getting your mind right and having a good trader psychology are just as important if you want to trade equities over monthly timeframes as they are if you want to hold an FX pair for 30 seconds.
We had a very productive chat with Doc Holiday this week in Episode 21 and although the detail of the strategies he uses to pick winners in the junior stock markets is totally different to a successful forex trading strategy, he still emphasised the need to master your trading psychology before you can become a successful shares trader.
In Forex day trading one of the first lessons you learn is to try and trade without fear or greed. Avoid jumping in on trades; wait patiently for the retracement, cut your losers, get out if your signal fails or the sentiment changes, etc.
If you have mastered this skill then it seems to directly translate into the equities markets. Doc Holiday’s key lesson for us being to trade dispassionately: have the stones to hold your stock picks if there is an initial dip while other people wake up to the value you’ve spotted; don’t fall in love with a company; and know when it is time to get out for profit or loss i.e. trade without fear or greed.
What is interesting then, is that we have only spoken to one trader that I am aware of who has a track record of success in both equities and forex. If the basics of risk management and trader psychology are the same then surely a diligent, intelligent soul who can master one can master the other?
Maybe. Maybe not.
Thoughts on a postcard