Lot of people/traders talk about how similar stock markets and the currency exchanges are. Both are leveraged products, both involve lots of risks and returns, both can be analysed using techies and fundies and we could go on and on about the similarities. But there is one crucial difference between how you trade stocks and how you trade currencies which many traders fail to realise and recognise. Due to the fact that they dont even realise it, they do not realise how powerful it can be and how it can be properly exploited to increaseyour profit potential and at the same time, decrease your risks as well.
The big crucial difference is the fact that in the FX market, i am talking about spot forex and not the futures, we always play one currency against the other while in the stock market, we always deal with only a single stock at any point of time. In other words, we are not bothered about how the share price of Microsoft is going to perform relative to the share price of Google. We are just going to be bothered about how it is going to go on its own respect.Whereas, in spot forex, we always need to see how one currency is going to perform relative to the other.
So, how does this affect our profit and risk potential ? Imagine this scenario: assume that there are 2 boxing bouts, one in which Muhammed Ali (one of the greatest boxers of all time) is up against Joe Frazier (another very good fighter) and in another bout, you have Ali against yours truly (yes !! Thats me, Karthik). Assume that the odds are the same for both the bouts. Which bout would you place your bets on ? It would of course be the one which pits yours truly against Ali. It does not mean that Joe cannot or never will beat Ali, its just that you want to be on the safer side,reduce your risk and make some very good,low-risk money. At the end of the day,Joe might even beat Ali, but you always play to the side which has lesser risk. And even if Joe does beat Ali, it is going to be a long,hard-fought excruciating fight which will make you keep biting your fingernails, not knowing the results till the last moment. While the bout between me and Ali is going to be a short straight forward low-tension fight. Now, can you think for a while and compare this scenario with the one in the spot forex markets ? I will catch you with part2 of this article.
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