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I am comparing traditional stock markets with the Forex market here.

I have noticed stock market have relatively limited leverage but have more change % as well as as volatility. On the other hand, 1% change is a big thing in forex market but they are highly leveraged.

Are their pros and cons of trading one type of instrument over other?

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  • It's a good question but the leverage part is irrelevant. You are just asking what are the pros and cons of forex vs stocks. Maybe change title? Remember regardless of leverage on the account you can just trade an institutes money and gain profit off that - so leverage isn't something to care about so much as long as you're good. – Worthy7 May 27 '20 at 5:12
  • @Worthy7 No. I think without high leverage, forex has penny returns. 2% change in Forex is a big event, where it's nothing in equities. So high leverage is important. – PhilipFisher Jun 9 '20 at 8:22
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Speaking generally:

  • Lower leverage means risk is better controlled. In the simplest case, an unleveraged long stock position (no matter how volatile) cannot lose more than what you put in. Higher leverage on a less volatile asset may be calibrated so that your expected exposure to volatility is the same, but there is more room for unexpected volatility to wipe you out.

  • A less volatile asset may be less likely to move enough in a short time to overcome the bid-ask spread, making trading less profitable. However, your particular example (forex) is highly liquid (small spreads) so this is not much of a problem.

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A trading edge is an advantage over other market participants. Its difficult to find, its duration is usually for a limited period of time because markets change all the time (days, weeks, months, and infrequently years). Most investors don't even know that edges exist.

In order to succeed with trading, not only must one have a trading edge but it must be combined with good risk management. Otherwise, one is likely to join the majority of traders who lose money.

You've asked about the pros and cons of trading in two different scenarios. As an indirect answer, I'd offer that it doesn't matter what they are unless you have an edge in that market and you practice disciplined risk management. What works in one of those markets isn't likely to work in the other. High volatility or low volatility shouldn't be criteria for deciding what and where to trade. Your skills should.

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Forex is like trading two stocks against each other in a way.

  • Where stocks have a company's financial reports, forex has a country's report. But stocks can also be affected by a country's economical health (Apple for example since it is a large part of the SP500 index)
  • There is a US Dollar Index (58% is EURUSD) which can be traded as "the USD".
  • The forex market doesn't close except on weekends.
  • Stocks are generally only traded on one exchange, forex is traded on multiple exchanges. This means that volume can't be calculated easily for forex.
  • Forex is way more liquid and will have much tighter spreads in general.

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