Forex and stocks are among the most liquid and popular financial markets in the world. Many traders choose to invest in both to diversify their portfolios. But can forex strategies work for stocks?
Most forex strategies work for stocks, too. Price action method, range trading, trend trading, position trading, and overall, strategies based on technical analysis apply to both markets. But methods based on fundamental analysis don’t. Value and carry trading are two market-specific strategies.
Read on to learn about these strategies, how they work, and what they entail.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What’s a Trading Strategy?
Trading strategies are plans that work like a framework in which traders work. They determine investing goals, trading time frames, and main trading objectives.
Among the wide variety of trading strategies, those based on technicals and fundamentals are the most important ones.
Technical trading uses technical and statistical trends such as trading volume and price movement. Technical traders study the changes in currency prices and volatility caused by supply and demand. Since these strategies can apply to any security type with historical data, they apply to both stocks and forex markets.
On the other hand, the fundamental analysis relies on the basic information that affects a company’s stocks or currency’s economic state.
Macroeconomic and microeconomic factors, a company’s liabilities and assets, revenue, growth potential, and profitability are all fundamental factors that affect the prices. This information may be qualitative, such as a company’s management, or quantitative, such as mathematical data to analyze an asset and predict its future movements.
Since different factors drive the stock and forex markets, fundamental analysis isn’t practical for both. While national and international political, economic, and geopolitical issues affect the forex prices, stock prices result from one company’s state and performance.
Common Strategies Between Forex and Stocks
Price Action Trading
Price action refers to a security’s price movement over a period. It’s a short-term trading strategy that uses past prices in different charts to make future trading decisions. Candlestick charts are particularly helpful in visualizing price actions. These charts show values at which trades open and close as well as high and low values.
Price action is a basic data source that helps develop other trading strategies. That’s because traders should consider other factors affecting price movements. It’s a speculative strategy that may have different results for traders. Even if two traders analyze the same price action, results may vary. That’s why traders, both stocks and forex, need to use other tools to ensure their prediction is precise.
Position Trading
Position trading is a long-term trading strategy in which a trader holds a position for months or years. Compared to other strategies, it’s more like an investment because it encompasses a long timeframe.
Position traders look for and invest in longer-term trends, ignoring short-term movements. This strategy requires them to know how economic factors affect security prices. They use both technical and fundamental analysis to spot trends and make decisions.
In this method, traders follow trends and wait for one trend to peak to sell the asset. However, it’s different from buy-and-hold investing, which involves holding positions for longer periods and building a portfolio for a long-term goal.
Range Trading
Range trading involves detecting overbought and oversold stocks and currency pairs. These areas are also known as support and resistance areas. The former indicates buying during support periods, and the former relates to selling in resistance times.
When an asset’s value breaks above or falls below its normal trading range, it indicates a positive or negative momentum is shaping. Traders look at these momentums and decide to buy or sell an asset.
However, they need to look at other indicators such as price action to make sure they’re making a valid move. The volume is another indicator that traders look at: the higher the volume, the more widespread participation. They buy the security when it reaches support and sells it when the price approaches resistance.
This strategy requires strong skills in technical analysis and takes a long time to bear results. However, it provides lots of trading opportunities and a good risk/reward ratio.
Trend Trading Strategy
Trend trading uses technical indicators to predict and identify market or asset momentum directions. It both applies to stocks and forex markets and covers all timeframes: short, mid, or long term. An upward trend indicates the traders should enter a long position, while a downward trend shows a trader should short a position.
Trend trading’s fundamental assumption is that a security has a predictable movement based on its current trend.
Various trend trading strategies use different indicators:
- Moving averages. This is the arithmetic average price over a specific time. When a short-term MA goes over a long-term one, traders enter a long position. Conversely, when a short-term moving average goes below a long-term one, the traders decide to short a position.
- Momentum indicators. Traders use a wide variety of momentum indicators to trade trends. For example, the relative strength index helps them know when to enter or exit a trade after spotting an uptrend.
Trading Strategies Specific to Forex or Stock Market
Strategies based on fundamental analysis are specific to each market since they have different fundamentals governing them. Here are some:
Value Trading
Value trading is specific to the stock market. According to this strategy, traders look for stocks the market underestimates and trades less than their book value. These investors know the true value of a stock and invest in it when it’s low. It’s like buying something at discounted prices and selling it at its real value.
Value investors use a combination of methods to find these undervalued stocks. They study the company’s revenue, cash flow, financial performance, and profit besides fundamental factors such as its competitive advantage, business model, and market. After investigating all of these factors, the investor decides if its stock value is less than its intrinsic value and makes trading decisions accordingly.
Carry Trading
Carry trading is specific to forex because it relies on the currencies’ differential ratios, meaning the difference between the two currencies’ interest rates. Carry traders look for currency pairs in which their buying currency’s interest rate is higher than that of their selling currency. The higher the difference, the greater the profits.
In addition to keeping track of interest rates, day traders have to monitor price changes, too. They should look for currency pairs with relatively fixed prices. If prices change dramatically, they can’t earn enough profits from interest rate differentials.
Day Trading
Although you can use day trading in the stock market, it’s more popular in forex. It’s a fast-paced trading strategy that involves buying and selling a currency pair within the same day.
Day traders take advantage of intraday price changes. They need to have large capitals, so they tend to use leverage more often. They mostly use short-term techniques like news trading and factors like market psychology.
Scalping is a form of day trading that uses small intraday price changes to make small profits. Traders use both manual methods and algorithms to know when to enter and exit a trade. However, the most liquid currencies are better for scalping due to tighter spreads.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
While forex and stocks are two distinct financial markets, traders can use the same trading strategies in both. These strategies include:
- Range trading
- Trend trading
- Price action trading
- Position trading
However, carry trading is specific to the forex market, while value trading only applies to the stock market.
Whichever strategy you choose, make sure it works for you by having an in-depth knowledge of your trading styles, preferences, and goals.
It’s also a good idea to test the strategies using a demo account and ensure they’re profitable for an extended period.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
Recent Posts
Exploring Social Trading: Community, Profit, and Collaboration
Have you ever wondered about the potential of social trading? Well, that curiosity led me on a fascinating journey of surveying over 1500 traders. The aim? To understand if being part of a trading...
Ah, wine investment! A tantalizing topic that piques the curiosity of many. A complex, yet alluring world where passions and profits intertwine. But, is it a good idea? In this article, we'll uncork...