FAQ Which Should I trade - Stocks, Futures or Forex etc.?

SHORT ANSWER

One man’s meat . . .
Each market has its own characteristics. Which one is best for you is down to personal choice. What one trader perceives as a feature or benefit of trading their chosen market, another trader will perceive as being a reason for avoiding it like the plague. For example, U.S equities traders will argue that they can trade any one of thousands of stocks listed on the New York Stock Exchange (NYSE) or the Nasdaq. One of the benefits of this is that on flat choppy days, when the markets as a whole are bobbing about in a tight range, there will always be some stocks that are trending strongly, both up and down. As a rule of thumb, most traders prefer to trade trending ‘instruments’ (explained in the Long Answer), rather than flat, directionless ones.

. . . is another man’s poison
On the other side of the coin are futures traders, who tend to view all the above as a huge headache! For them, looking for stocks that are trending can be like looking for a needle in a haystack. They maintain that trading one or two equity index futures is much simpler. (Not easier necessarily, just simpler!) They can really get in tune with their instrument(s) of choice and don’t have to spend hours each day just hunting for possible candidates to trade. Even with a shortlist of twenty or so stocks from the thousands available, tracking them all in real time can be problematic.

Focus on one – two at most
It’s all too common for new traders to start trading one market because that’s what their mate trades or because of some misguided belief that it’s easier to trade one market than it is another. There is a view that really good traders can make consistent profits trading any market. This may or may not be true. What is certain is that the majority of successful traders focus on one or two markets at most and, very often, just trade a handful of instruments within those markets. Follow their lead – at least in the early days while you’re finding your feet. Sifting through the available options to decide which market has your name on it will take time, but it will be well worth your while.

What Should I trade?

LONG ANSWER

What are the options?
The main markets can be split into four generic groups. By far the biggest of these is the foreign exchange market, referred to as the ‘Forex’ market, or simply as FX. How big is big? Globally, allegedly, in excess of 3 trillion U.S. dollars is traded every single day! As well as being the biggest, it’s also the most popular among retail traders – i.e. typical T2W members trading from home. But – and this is a big but – size and popularity doesn’t necessarily make it easier to trade!

The next two most popular markets are equities (i.e. stocks and shares) and futures. Of the equities markets, on T2W, U.S. and U.K. equities compete for pole position, the former being especially popular with day traders. Futures markets are split into two groups: equity index futures and commodity futures.

Indices such as the FTSE 100 in the U.K or the Dow Jones in the U.S. are not tradable instruments. (The term ‘instrument’ is a generic term referring to a specific stock or commodity etc. For example, BP is an instrument in the U.K. equities market. The e-mini S&P 500 [ES] contract is an instrument in the U.S. equity index futures market etc.) Equity index futures are especially popular as they effectively bypass this problem and allow traders to speculate on the movement of an entire index, as opposed to just individual stocks that make up the index.

Commodity futures are sub-divided into 5 categories: Energy – e.g. oil & natural gas, Metals – e.g. copper & gold, Livestock – e.g. pork bellies & feeder cattle, Grains – e.g. soybeans & rice and, finally, ‘Softs’ – e.g. orange juice & cotton.

At the bottom of the pile, at least in terms of popularity among T2W members, are the Money Markets, e.g. Eurodollars, bunds, bonds, interest rates and swaps etc. These are favoured by institutional traders working for banks, hedge funds and proprietary trading firms.

Deciding which of these markets - and which instrument(s) to trade within each market - is a matter of personal choice. All have their pros and cons. Here are half a dozen ideas to help you make an informed decision about which market is best for you . . .

Help is at hand here on T2W . . .
Read the Essentials Of First Steps Sticky as it contains a lot of essential information for new traders. Also, it touches on the question in hand in post #2 of the thread under the section entitled: ‘Where Do I Go from Here?’ Next, familiarise yourself with all the different markets and learn as much as possible about each one. Most of them have forums or sub-forums in the’ Forex Markets’ and ‘Financial Markets’ blue forum categories of the site. Read any of their ‘Essentials’ Stickies and then check out the Articles section of the site. This will have contributions about the markets that interest you the most. Try to get to the core of what makes each market tick. In the words of the famous investor Peter Lynch, ‘Never invest in an idea you can’t illustrate with a crayon’.

Get advice from experienced traders
Look out for other traders on T2W who – as far as you can tell – appear to know and understand their market well. Besides reading their posts, you can click on their username and read their profile. This often provides details about how long they’ve been trading and where their experience lies. Ask them questions about their market, either via posting to the boards if appropriate, or by contacting them privately via PM or e-mail. Find out firsthand what they like and dislike about their market, what its pro’s and con’s are and what advice they may have for a new trader looking to get started in that market.

You, your knowledge and your interests
What are your interests? When asked why they trade the market they do, many traders will answer that their market is one they like, understand and are comfortable with. This is a more sensible approach than just jumping on the latest band wagon and trading the same market as your neighbour, brother-in-law or the bloke you met last night in the pub. Prior to the .com bubble in 2000, traders were drawn to the equities markets like moths to a flame. Everyone knew someone making a killing in the stock market or heard about someone doing it via the media. Heed the wise words of Warren Buffet who advises, ‘Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well’. So, don’t just jump on the latest bandwagon with everyone else; take the time to research the options properly to find the right market for you.

Your personal circumstances
Be practical and consider your personal circumstances. Which time zone do you live in? How much money and how much time will you be able to commit to trading? If you live in L.A., then you probably won’t want to day trade European indices or stocks! Similarly, if you live in Europe but work 9 – 5, then day trading European indices or stocks may also prove difficult. However, if indices and stocks are what float your boat, consider the U.S. market as their cash session doesn’t close until 9.00pm U.K. time.

Be a master of one - rather than a Jack of all trades
Be wary of trading lots of different markets – especially when you’re starting out. Whilst it’s fun to joke with friends that you’re long pork bellies, short ‘cable’ (the $USD / £GBP currency pair) and cashed out of equities – it’s probably not such a great idea in practice. As a rule of thumb, experienced traders tend to advise newbies to focus on one market and one style of trading at a time (i.e. day trading, swing trading or position trading). Trading multiple markets across different timeframes is best left to those with experience.

Dipping your toe in the water
If you haven’t done so already, sooner or later you’ll want to open a brokerage account to be able to trade. Many new traders start with spread betting accounts which offer some distinct advantages to new traders. Firstly, they cover a broad range of markets, providing you with the opportunity to ‘suck it and see’. Secondly, most – if not all of them – offer a simulated trading facility enabling you to paper trade without risking any real money. Additionally, many firms offer a facility that enables you to trade very small amounts so that if you incur losses early on – they are small. In effect, spread betting companies make good kindergartens for traders. Keep in mind however, that when you’re ready to move up a rung or two on the trading ladder, your spread betting company may or may not offer the best tools and resources to ensure that you’re consistently profitable in the future.

A popular myth
Besides the question ‘What Should I Trade?’, there is a similar one that is often asked by newbies: ‘Which is the Easiest Market to Trade?’ The idea that one market is easier to trade than another is largely a myth. If it existed, everyone would naturally gravitate towards it in search of easy profits. After all, only trading masochists would deliberately seek out treacherous markets that are known to be especially tough to trade! What traders mean when they say that one market is easier to trade than another is that for them personally, say, futures is easier than Forex for example. This is their reality: it doesn’t necessarily follow that it will be your reality too.

The bottom line is to do your own research and to be guided by your own feelings, views, beliefs and understanding of how each market functions. Take your time, they’re not going anywhere, each one will still be here next month or next year!

What Should I trade?

USEFUL LINKS

If you find other threads, Articles or sites on your travels around the net that are relevant to this FAQ, please add a link to them in this thread, outlining what it is that you like about them. Thanks!

T2W THREADS
None here? If you find a good one, let us know and we’ll add it!

T2W ARTICLES
Why Trade? by Robert Newgrosh
Before deciding what to trade, this article investigates your reasons for wanting to trade at all.
What Style of Trader Am I? by Don Dawson
Having concluded that you definitely want to trade, the next issue to tackle is the style of trading that will suit you the best. Once these two questions have been addressed, you'll find it much easier to decide which markets and instruments to trade.

EXTERNAL LINKS
None here? If you find a good one, let us know and we’ll add it!

there's an old saying along the lines "if you failed at trading everything else, try Corn"

If you're asking this question, the only thing you should be trading is a sim account!

jj

There are as many ways of trading as there are whales in the sea - and as a newbie you have the hardest task of all; finding something which suits your style, personality, and emotions.

As a beginner I suggest you identify a group of stocks first. The easiest ones are US stocks with high-ish daily volume (Nasdaq 100 stocks for example). Then remove any which are below, say, $5 or $10 per share. You then have a universe or basket of stocks to watch.

Then spend a long time (weeks and weeks if not months and months) looking at the way the prices form. Research one chart pattern, and look for it in these charts. Get used to seeing how it forms (looking back historically is OK to start with, but it's more important that you recognise a pattern as it is forming, not after it has formed).

[...]

Once you understand the basics of how prices move, then you are well on the way to getting yourself ready to make your first trade. Don't rush the early stages, because these really are the most important. There's lots of stuff to read on these boards, but do try not to distract yourself from looking at the price by using indicators, colourful lines, etc.

-- Skimbleshanks

The best markets are dynamic

There are enough markets to go round so basically finding the one that fits your expectations would be advisable as would trying to avoid markets that are not very dynamic.

The highly liquid markets of Non-fat dry milk could be perfect for traders who wish to day-trade a commodity without trading against the worlds top proffesionals who trade Corn...
Not only does it give traders daily trends, but it also reacts to indicators perfectly. Try stochastics, if its oversold, it will definately go up, its the law.

Volume for the 2nd of July reached an all-mighty 0, a new-record for NFD milk, open interest remains highly indicative of future price direction.

This could be the perfect market for any beginner!

A very good question. And not easy to answer. I suppose trade something you are interested in!. With stocks and shares it is a bit easier; there is usually a sector with which you have some strong feelings.
Reminds me of a talk I gave at APCIMS many years ago. On the subject of stock selection ohares I suggested that it might be "the company that brews your favourite tipple". I had been 'instructed' to occassionally focus on individual memberes of the audience. As I spoke the above words I focused on this chap in the front row and could'nt help noticing he had a prominent and ruddy brewer's nose.It was difficult to un-focus after that! OK, you had to be there.

You can trade anything and everything but you need to do your homework first;
Understand the market , undersatnd the character of the sectors / shares / commodities.
Ask yourself some questions: when will I be trading - Morning, afternoon or evening? How will you be trading - day trading, scalping, swing etc. Can your chosen style of trading be applied in the timeframe you have allocated for trading?

These are just some of the basics that you need to cover and the answer to "what should i trade" should start to unfold.

Read read and read again. Theres sooo much to learn, but when cracked its soo worth it. I can point to some sites for all in one solutions. PM me if you want, not gonna post here.

As for your instrument of choice. It can take some time to get a feel on that, sometimes you trade everything, sometimes not, I trade primarily Nasdaq stocks (lower priced) and Crude Oil via /CL. I am content but also sometimes do a bit of /NQ too.

For something to watch, you could watch the DOW which is a nicely liquid Futures market (/YM), quite trendy and one of the slower more liquid markets - BUT, it can bite exceptionally hard, so paper it and go pattern searching.

Pick a strong currency, pair it with a weak one, then trade that pair! Of course that's much easier said than done. Like the others mentioned, you gotta do your research first. But the principle's pretty much that simple, at least that's how I learned from the BabyPips.com School of Pipsology. Workin' out for me so far

littlebopip said:

Pick a strong currency, pair it with a weak one, then trade that pair!

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How about a more moderate currency cross such as EUR/GBP. Very good technically and has big pips!!!

Jumpinjack said:

How about a more moderate currency cross such as EUR/GBP. Very good technically and has big pips!!!

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That works too! Whatever floats your boat. Those crosses are just a little more choppy sometimes, but they do yield big pips. I guess it's all about finding out the particular "characteristics" of the currency pairs, whether its a major, yen cross, exotic pair, and finding out whether it fits your trading style.

Depends on the risk you can take. Whatever the thing you're trading, make sure you're clear the risk you faced. Meanwhile, take a clear picture of the thing you're trading.

For me Forex fits perfect. As it's the biggest Market with the biggest liquidity! And you are able to use leverage. MT4 is a simple trading station, you should give it a try

Matthew512 said:

For me Forex fits perfect. As it's the biggest Market with the biggest liquidity! And you are able to use leverage. MT4 is a simple trading station, you should give it a try

Click to expand...

Yes, Forex is the biggest market with high liquidity and Spot Forex is the preferred playing field of the deluded. NO; don't give MT4 a try. It was developed by Russian programmers with the express purpose of allowing market makers to cheat their clients.

If you want to trade, then trade in a market with a regulated exchange. The commodity futures are as good as any but, after 25 years of trading, I've seen nothing to beat physical ownership of equities. Leverage can be an asset but, it can, also turn a small liability into a catastrophic loss.

alan5616 said:

Yes, Forex is the biggest market with high liquidity and Spot Forex is the preferred playing field of the deluded. NO; don't give MT4 a try. It was developed by Russian programmers with the express purpose of allowing market makers to cheat their clients.

Click to expand...

he can try it for charting purposes, at the least.....

Depends on a few things. Are you going to be a Technical trader only or are you adopting another style? this is key to what you should trade. Also what is your goal and timeline?

If I’m completely honest I’m not that much of an expert on Futures or Forex, I would personally go for Stocks. I find them far easier to understand and far more straight forward than either of the other two. When trading stocks, you are trading shares of companies that cost anywhere from a few pounds to hundreds of pounds. There is a fairly limited amount of stock available, and you only have to really be bothered about the company’s ability to turn over a profit. When you are trading Forex (currencies) you have to bear in mind that a country’s currency can and will fluctuate, this makes the whole thing far more complex than only having to consider whether a company is going to make much money in that particular quarter.
Obviously it is entirely up to the individual’s preference, if you are a bit more experienced then maybe Forex or Futures are for you but for amateurs like me I’d stick with Stocks!