The odds are pretty good that if you’re looking to do a bit of investing you’re going to be looking at either the foreign exchange market or the stock market. Both of these investment markets have a long and illustrious history of helping people make mountains of money with smart investments – even if those initial investments started off quite small.
Both of these investment markets also have a tremendous amount of trade volume, a tremendous amount of trade volatility, and (relatively) low barriers of entry for beginning investors. Do Forex trading strategies work for stocks just as well as they do trading foreign currency pairs? Should you have special strategies for both of these investment types and never try to confuse the two with one another?
Forex trading strategies do work within the stock market, although there are differences between the two. Moving averages are typically used across the forex and stock markets as a great indicator of trend, direction and volume. Most trading strategies will need slight refinement when using them across a different market.
Do Forex Trading Strategies Work for Stocks?
A big piece of the success puzzle in investing (whether you’re talking about the Forex world, trading stocks, investing in commodities, real estate, etc.) comes down to research, due diligence, and recognizing “what time it is” in the market.
Learning the ins and outs of doing this research and due diligence in developing the gut and instinct necessary to know what the market is reacting to – and how to predict where it’s going to be after you put in your position – takes a lot of time, energy, and effort.
All successful investors understand how much sweat equity goes into learning the Forex world and the stock market.
At the same time, with so much to learn and so much to understand a lot of folks are looking for shortcuts that help them in multiple asset classes – strategies and fundamentals that work just as well in Forex as they do in the stock market.
Do Forex trading strategies work for stocks (and vice versa), though?
They sure can!
Now, obviously, there’s usually not a 1:1 method of utilizing the same strategies in Forex and stock trading to get the same result. But the fundamental principles, the tactics for market and technical research, and learning how to read the market are all fully transferable skills.
What Do Both The Forex & Stock Market Require From Traders?
Both of these markets demand that you fully research your positions and the market before you jump right in.
Both of these markets demand that you have a specific strategy with clearly outlined goals and analytics you rely on to determine whether or not you’re getting closer or further away from those goals.
Both of these markets (in a broad sort of sense) are better suited to investors that are willing to tolerate a bit of risk in exchange for a potentially outsized reward.
And both of these markets allow you to capitalize on the power of leverage to take a relatively small nest egg and initial investment and turn it into life changing amounts of money.
So do Forex trading strategies work for stocks? They can – and will – if you’re willing to put in the time, energy, and effort to master the fundamentals of trading both of these markets.
The Differences Between Forex Markets and Stock Markets
As we highlighted a moment ago, these markets are not clones of one another and you have to understand the subtle nuances of both if you’re going to use similar strategies when trading them.
For starters, it’s important to recognize that the Forex market is much more in tuned with investors that are particularly active.
Forex Trading Strategies Need To Be Much More Agile
Forex is lightning fast, filled top to bottom with global competition, and is available on an almost around-the-clock basis. Active traders that like to be right in the thick of things on a day-to-day basis have a better chance of success than those that are more passive.
Stock Market Strategies Need To Be Geared Towards Long Term Moves
The stock market, on the other hand, generally favors investors that take a longer-term approach to this market.
Equities investing in general is perfectly suited to those that like to “buy and hold” – sometimes for years – before even thinking about cashing out.
A strategy like that isn’t going to bear a lot of fruit in the Forex world.
There are other fundamental differences between the Forex markets and the stock markets around the world (particularly the actual investments that you are taking part in), but there’s enough overlap between the two that you can make similar strategies work across both.
Using Moving Averages on Forex Chats and Stock Charts
Trading a moving average strategy can be incredibly successful in both the Forex market as well as the stock market.
A simple moving average (sometimes called the SMA) and the exponential moving average (EMA) are to particularly popular moving averages that investors in Forex and stocks love to utilize.
An Example Trading Strategy For Both Forex Markets And Stock Markets
The SMA is a strategy that averages out the price of a Forex currency pair or stock across a specific stretch of time. The EMA is a strategy that weights certain prices across a similar stretch of time.
That stretch of time is usually standardized – typically a 10 day, 50 day, 100 day, or 200 day block of time. On top of that, investors sometimes use moving averages in combination with envelope, ribbon, or convergence/divergence style investment strategies to get a better idea of exactly what they are working with.
You do need to know that a moving average is a lagging indicator, though. This means that any moving average strategy should not be used as a predictive indicator. They aren’t going to tell you where the price is headed.
Instead they tell you where the price has already been and where it has the potential to move in the future.
Technical analysis like this can be hugely important to new traders in both the Forex and stock markets. When you start to see assets trading over there moving average the chances are pretty good that you’re going to see a breakout – and the same is true if the asset is trading below that moving average.
Master recognizing and analyzing this and you’ll be a better Forex and stock investor for sure!
The Benefits Of Trading Both The Forex & Stock Market
There are a huge range of benefits of being so well versed in the markets that you’re able to use your strategies across different instruments.
The main benefit of being able to trade strategies in various markets is the fact it massively increases your amount of potential opportunities per year. This is incredibly important when you’re looking to aggressively scale your trading capital or even look at become a funded trader.
Let’s take EURUSD for example…
- An average of 2 trading setups per month
- An average win rate of 50%
- An average risk:reward ratio of 1:3
Assuming you never miss a trading opportunity on this currency pair, you’re going to cap yourself at a yearly return of 36x. I’ve simplified this and ignored compounding, but you get the point. Whilst this is still incredibly impressive, imagine if we added Tesla in there too.
Let’s assume that Tesla has…
- 4 opportunities per year
- An average win rate of 50%
- An average risk:reward ratio of 1:10
This takes your yearly multiple from 36x to 56x (ignoring compounding and the intricate details).
This example is using you’re just trading a few pairs over the higher time frames. You can see how this can easily snowball if you’re looking at trading a basket of potentially 6 forex pairs and 6 stock instruments, using the same trading strategy.
The Importance Of Diversifying Markets
Taking the huge potential returns out of the picture for a minute, let’s look more at the capital preservation aspects. Whether you’re a funded trader or you’re trading your own equity, it’s incredibly important to ensure that you’re not experiencing a large amount of drawdown.
By being able to quickly adapt and use your trading strategies in any markets, you’re able to be hedge risk and become so agile within the markets.
A great example of this in motion was in 2021 by a trader named Jonny Godfrey (the founder of Trading Masterclass). Due to the state of the global economy, the forex markets had a tremendously rocky year.
Instead of sitting on his hands and taking capital out of the markets to adjust for the volatility, Jonny applied his strategies in the cryptocurrency markets and ended up making a huge return for the year, despite there being very few good forex opportunities in Q3 and Q4.
In Conclusion – Do Forex Trading Strategies Work For Stocks?
In summary, forex trading strategies can work for stock trading, but it is important to note that there are still big differences between the two.
In Forex trading, moving averages have more of a predictive nature and can be used to signal future trends. In contrast, in stocks they are lagging indicators and should not be looked at as predictors for future price movements.
Do you trade stocks and forex? Let me know in the comments down below.