Trading Tips

Penny Stocks vs. Forex Trading

Tim Sykes seems to be someone people either love or hate. He is upfront and straightforward with his opinions, which is why I asked him to contribute to the FAQs book. That doesn’t mean I always agree with him.  His 5 Reasons Penny Stock Trading Obliterates Forex Trading is a case in point.

Tim Says: The unlimited profit potential in the hugely liquid and leveraged forex market is pure marketing and deception, designed to lure the most desperate and greediest people into playing a game where the odds of success are very low similar to playing the lottery.

I won’t disagree that the marketers have a field day going after new traders by trying to hook them in on the big profit potential. The forex market does offer opportunities to small traders in ways most other markets don’t, but I definitely could do without the sales pitch I see a lot of brokers and system markets putting out there. It’s worth noting, though, that penny stocks have at least as bad a track record here, and a much longer one at that. I’m not suggesting penny stocks should be avoided. I’m just saying that both markets have been subject to some shady operators taking advantage of people.

As for the odds being similar to the lottery, that’s pure hyperbole.

Tim Says: Because Forex is so liquid and leveraged, those who succeed are the smartest, richest and most well informed people on the planet, aka George Soros and his friends.

Tim’s big point here seems to be those who attempt to manipulate the penny stock market are idiots, but the big players in forex are super smart. Tim has a strategy for trading penny stocks that works against the manipulators, and it’s one he’s had considerable success with over the years. I won’t challenge him on that part of the equation. As for forex, though, the very size and liquidity of the market makes the sort of manipulation Tim feeds on in the penny stocking world a much less workable prospect. Besides, I hold the view that an individual trader need not play in the same pool as the big boys, and can be at least as intelligent and informed where longer timeframes are concerned.

Tim Says: Forex prices move very quickly and the reaction to breaking news happens within seconds and minutes.

That’s true for any market these days, but Tim is trying to make the point that the manipulation in penny stocks which he plays off takes time to build up. I’d argue that the good trends in forex trading also take time to develop. No need to be playing in the short timeframes where news has a significant impact if one doesn’t want to do so.

Tim Says: Penny stocks are simpler. While forex prices gyrate wildly due to rumors, news and those anticipating the rumors and news, volatile penny stock chart patterns are truly straight up and then straight down with very little variation.

Hah! As if penny stocks don’t react just as wildly to rumors and news. In fact, on a straight up % change basis they move WAY more than forex rates do (see Looking at Volatility Across Markets).

Also, forex traders don’t need to worry about pattern day trader rules and have no constraints against taking short positions.

Tim Says:  Penny stocks have greater odds of success.

First, this is a meaningless statement without the figures (on both sides) to back it up. Second, as I’ve repeatedly noted, win % is only part of the performance equation, and not a determinent of it by itself. Tim mentions a 75% win rate for the types of trades he does, but I can demonstrate how even that win % doesn’t mean a winning system – and that’s not even talking about risk management.

My bottom line has always been that traders need to trade the market that suits them best. For some that will be penny stocks. For others it will be forex. I certainly have a professional interest in the foreign exchange market, but I don’t think it’s inherently better than the one for penny stocks, or vice versa.

By John

Author of The Essentials of Trading