Foreign exchange traders are considered the cream of the crop within the day trading universe. Forex markets operate 24/7 with trillions of dollars exchange hands on a daily basis versus around $800 million in US stocks.
Navigating through the complexities of the forex market means traders can talk endlessly about the monetary and fiscal policies of multiple countries. Successful traders look forward to central bank policy announcements and will watch a live feed from the Bank of Japan or European Central Bank regardless of time zone differences.
Leveraging the advanced knowledge of forex markets is an excellent asset for those that want to start trading penny stocks full time or on the side.
Here is a list of four reasons why forex traders should consider trading penny stocks instead.
Forex Traders Can Recognize Lies And Deceit
One of the biggest disadvantages of trading penny stocks is the unfortunate occurrence of schemes and frauds. Pump and dumps are among the most common crimes in the penny stock universe.
In short, schemers will accumulate a large position in a mostly unknown penny stock and then “pump” the company’s outlook and prospects in message boards and other forums. Many gullible penny stock traders and investors will start buying the penny stock and bid the price higher so the schemers can offload their position at a much higher price.
Successful forex traders are used to reading through central bank policy reports to identify discrepancies and half-truths. Such was the case in 2019 when US Federal Reserve Chairman Jerome Powell described low inflation as “transitory” instead of “persistent.” The US dollar immediately rallied off one unusual word.
Successful FX traders that can profit from one out of place word, are unlikely to fall victim to pump and dump schemes and other forms of deceit. FX traders can even leverage their intellectual advantage by short selling penny stocks they identified are maliciously being pumped in value to ultimately profit when the stock comes crashing down.
Forex Traders Understand Risk
Trading penny stocks is a risky proposition, but so is trading forex. Penny stocks are highly speculative and are known to move 20% or more in seconds in either direction, leaving exposed traders with large losses in such a short period of time.
Forex trading can be just as risky for the trader because of the margin requirements. Forex traders typically have access to leverage as high as 100:1. This means that a $1,000 funded account would have access to trade $100,000 worth of currencies. Such a high level of leverage naturally magnifies gains but at the same time enlarges losses.
Risk management is considered to be among the most important traits of a good trader. Forex traders that excelled at managing risk quickly and efficiently could find it much easier to cut losses in penny stocks so they can better focus on maximizing gains.
Penny Stock Returns Are Much Higher
Even when taking into account the 100:1 leverage available to forex traders, penny stock trading and investing offers the potential for much higher returns. One just needs to take a look at the many high-profiled penny stocks that soared in valuation in 2020 and early 2021.
Here are just a few examples:
● AMC Entertainment Holdings Inc (NYSE: AMC) from $1.91 to $20.36.
● Bloom Energy Corp (NYSE: BE) from $3.00 to $44.95.
● FuelCell Energy Inc (NASDAQ: FCEL) from $1.00 to $29.44.
● GameStop Corp. (NYSE: GME) from $2.57 to $483.00.
● Novavax, Inc. (NASDAQ: NVAX) from $3.65 to $331.68.
● Overstock.com Inc (NASDAQ: OSTK) from $2.53 to $128.50.
Granted, holding penny stocks for several months or longer does not fall under the traditional definition of day trading. But penny stock traders are able to take advantage of momentum stocks indefinitely at no extra cost.
By contrast, forex traders could end up paying an overnight fee on a currency pair and this would eat into their profit potential as each day passes.
Penny Stocks Can Free Up Cash
Despite what the name implies, penny stocks mostly refer to shares of a company that trades below $5. But many penny stock traders tend to focus on lower-priced stocks to reduce their overall cost of trading.
Successful penny stock traders typically have an account size in the $10,000 to $15,000 range. Some international stockbrokers offer margin for US stock trading, typically as much as 6:1.
Forex traders looking to free up capital for other purposes, such as long-term blue-chip stock buying or real estate investments, can liquidate their forex trading account. After pocketing enough capital for long-term investing, successful forex traders would certainly have enough cash left over to fund a good-sized penny stock trading account.
Conclusion: Penny Stocks Has Many
Advantages Over Forex
Trading penny stocks offer forex traders the potential to earn outsized returns in an environment that won’t be too unfamiliar. Expert forex traders should be able to casually switch over to the equity universe with little to no difficulty after doing their proper research.
But at the end of the day, many forex traders won’t even consider making the switch because trading currencies is what they excel at. As the old saying goes, if it isn’t broken, don’t fix it.
Just because someone can transition from forex trading to penny stock trading doesn’t mean they should. Sticking to what you are good at is not something that everyone is ready to mess around with.