Business & Finance Investing & Financial Markets

What are the Differences Between Forex, Futures, and Stocks?

Trading and investing can be immensely obscure. There is so much dense jargon to be learned: pips, short, long, bullish, bearish, ask price, bid price, candlesticks, consolidation, triangle chart patterns, trends, trade limits, to only name a few. Most novices are actually befuddled as to what forex (foreign exchange), futures (commodities), and options (stocks) means. Yes, it's a brave new world for those who are inexperienced. Luckily, in this article, I will explain some of the nuances and intricacies of trading and investing.

Forex

Forex just stands for foreign exchange. It is called the foreign exchange market because currencies are traded. For example: The USD can trade against the AUD, or the Euro can trade against the YEN. You, the reader, may be asking, "How are these currencies traded against each other." Well, to strip off the esoteric jargon and put it in layman's terms: One currency is going up, while the other is going down. The currency that is headed up will be termed as "going long" while the other that is headed down may be labeled as "going short." Is the explanation a bit reductive? Yes, but that is a good thing. There is nothing worse than a novice who suffers overload from something that is unnecessarily convoluted. Often, among other indicators, forex traders will use triangle chart patterns, of which there are three types: Ascending, descending, or symmetrical. They determine whether there is a developing uptrend, a downtrend, or if there is consolidation, which denotes that the trade is not making any dramatic movement. This is a very practical tool.

Futures

Futures are commodities. A commodity can be any number of things: oil, corn, rubber, oranges, pork, Soy, lumber, etc. Recognizing that commodities are "useful things," it shouldn't be a hard concept to understand. These futures are traded by investors. To trade futures, contracts are involved. Don't be intimidated, however. The contracts can be terminated at any time throughout the trade.

People who trade futures are organized into two columns: hedgers and speculators. Hedgers handle the production of the commodity. This group may include farmers, manufactures, oil companies etc. Speculators have no connection to the production of the product. Think of them as independent.

Those who trade futures may use indicators like they would for forex. For instance, triangle chart patterns are popular. It's a tool used to track trends in the product; to see where the price is headed.

Stocks

They're often called options. Stocks can be traded in two ways: on a market exchange floor or via one's own computer. To see an example of the former, just flick to CNBC, and you will witness the electric frenzy that comprises trading on the floor. Stock trading that is done via the computer is not much different than forex or futures. However, it can also be much safer in terms of risk management. In stock trading, premiums are bought. In the event that a trade moves against you, the highest you can lose ids the amount you put to the premium. So, if you invested $500 dollars in the premium, and the trade is not progressing in your favor, you will only lose the $500. Forex and Futures are not accompanied with this premium. On the other hand, they have something called a stop order, which will set the amount of money that can be lost in a trade. If these things aren't used, you're liable to wipe out the entire account if you don't close a losing trade in time. Triangle chart patterns, just as with forex, is very popular with options, if not more so.

If one knows the differences and the terminology-- whether it's the finer points of forex and futures, figuring out which triangle chart pattern can best illustrate a trend-- the trader has a higher chance for success.


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