Efficient medium and long term trading styles in any market generally involve following the major underlying trend by trading in its overall direction. This tends to hold true no matter whether the market being traded is engaged in an upwards trend, known as a bull market, or in a downwards trend, known as a bear market. The relatively unregulated forex market provides traders with the opportunity to easily trade with the trend, no matter whether it is heading up or down. On the other hand, stock market traders often have to take into account other factors resulting from regulation intended to prevent stock market crashes.
Regulation Often Prevents Trading in Stock Bear Markets
Unfortunately, what some traders consider to be excessive regulation of the stock markets has prevented stock traders from having equal access to taking long and short positions in stocks.
Basically, the stock market has undergone numerous rule changes after the various crashes in recent memory. These rules, while somewhat effective in stopping market crashes, have made stocks exceptionally hard to short in sharply declining markets.
Such regulation has even barred traders of some financial stocks from making short sales altogether when the market is down a certain percentage.
Furthermore, stocks tend to trend according to the outlook for the individual company or for the market in general. Poor performing stocks will still appreciate in a bull market, while good stocks with strong earnings will also decline in a bear market, although perhaps not as much in percentage terms as the overall market.
Trade Bear Markets Freely in Forex
The good news for forex traders is that the foreign exchange market differs from the stock market in this important respect due to its relatively lack of regulation. Basically, you can go long or short just about any currency pair at any time you can find a price.
For example, stock traders cannot sell stocks they do not own, often called shorting a stock, after a downwards tick in the stock’s price. Instead, they need to wait for an upward tick to short a stock.
Forex traders do not have to operate under this restriction. As a result, bull and bear markets remain equally easy to trade in the forex market, unlike in stock markets where restrictions on short selling can apply.
More Advantages of the Forex Market’s Lack of Regulation
Also, since the forex market is for the most part a free and unregulated market, its moves tend to be dictated by the flow of orders and the market forces of supply and demand, although central banks do sometimes intervene to smooth out sharp or undesirable exchange rate fluctuations in its nation’s currency.
In addition, all currencies can not decline simultaneously in the forex market because they trade in pairs against each other. This differs from stocks, where literally all stocks in a given market can move down in a typical bear market crash scenario. This is why the SEC has instituted such strict short selling rules on stocks.
Overall, the greater freedom that the forex market permits traders tends to make the forex market more efficient and allows traders to profit equally and easily from either bull markets or bear markets that may be prevailing in one or more currency pairs.
There is some regulation in the forex market as well, and here you can see the different regulatory agencies.
Learn more on trading the trends in forex.
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