Understanding the Forex Market

The forex market is a global market where foreign currencies are exchanged for various reasons. It is the largest and most liquid global market, open 24 hours a day.

The Forex market is the most liquid market in the world, handling over $5 trillion in transactions per day. The remarkable liquidity in the Forex Market means that prices can quickly respond to global economic news or events. Even small changes in how much people want to buy or sell can lead to significant shifts in prices causing significant price fluctuation. 

Image 1: USDJPY 30-minute chart shows price fluctuation from 21/9/2023 to 16/10/2023. (especially on 3/10/2023)

One important concept beginner traders need to be clear about is that, in the Forex Market, an open position refers to any active or ongoing trade that hasn't been closed by an opposing trade. Whether it's initiated by a buy (long position) or a sell (short position), the position stays open until there's a corresponding trade in the opposite direction. Price changes will directly affect your open positions until you close them. On the other hand, closing a position involves carrying out a security transaction that directly counteracts and cancels out an existing open position, effectively closing the initial market exposure. 

Hence, due to its liquidity and susceptibility to significant price changes, risk management in the Forex market aims to reduce losses stemming from fluctuations in exchange rates. 

Understanding the Stock Market

On the other hand, the stock market allows traders to buy and hold share units of listed companies. The trading hours of the stock market depend on the country’s time zone of the exchange where the company is listed and are typically from 8:00 a.m. to 5:00 p.m. in that particular time zone on weekdays.

Changes in individual company share prices depend on company performance, prospects, industry outlook, management style, etc. Most exchanges have set a range to control daily price volatility in the market. Additionally, there is lower liquidity compared to the forex market. Hence, price changes in the stock market are generally gradual and less significant compared to the forex market.

Image 2: MAYBANK 30-minute chart shows stable price movement from 21/9/2023 to 16/10/2023

In the Stock Market, buying a share means actually owning the share unit until you sell it. Price changes in the market will not directly affect your portfolio unless you decide to sell it, which will then incur realized profit and loss to your account value. 

Risks in the stock market are mostly related to the company’s management style and performance. Therefore, an effective risk management strategy in the stock market is to avoid non-performing companies.

Risks and its management 

There are 2 main risks to take note in the Forex market.

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