Should You Pick Stocks or Currencies?

Dec. 18, 2013

There’s no question that the trading world revolves around stocks. If you watch CNBC in the morning, you might see three hours of stock coverage and twelve seconds on currencies.

Furthermore, stocks are more fun. In the stock world, you get Cramer and Buffett and Lynch and Darvas and StockTwits and The Motley Fools and Value Line and Investor’s Business Daily, and I love them all! For currencies, you get a boring banker saying boring things about stuff you don’t understand.

Plus, stocks are real companies. You can buy Apple stock and then go to the Apple Store. You can buy holiday decorations at Home Depot and then go check your Home Depot stock. For currencies, you can buy the USDJPY and then go look at a bag of quarters. Not quite the same.

But, if you’re going to trade for a living, is stock trading more profitable than currency trading? That’s really what you need to know.

There are a lot of different ways to look at this issue. With 10,000 stocks to pick from and only 20 or so currencies, it’s tough to make it an apples-to-apples comparison. Nonetheless, I decided to take two 15-minute charts, one of a “boring” stock and one of a “boring” currency. Then I traded them with the same System for the same length of time (since 2002) and used leverage that gave them a similar maximum drawdown. Here’s the breakdown.

Boring stock chosen: 3M (stock symbol MMM). I chose this because it’s a Dow Stock with steady growth and no big price shocks in its past.

Boring currency chosen: USDJPY. Movement on this currency pair can be sleepy at times.

Account Size: $10,000

Starting stock price: on July 10, 2003, MMM was trading at $64.65

Starting USDJPY price: On January 9, 2003, the USDJPY was trading at 119.27.

First stock trade: I used 50% margin on my $10,000 account, so I bought 232 shares of MMM @ $64.65. I also bought 232 shares each trade going forward.

First currency trade: 1.2 lots @ 119.27

Here are the results.

At the end of 10 years (through December 18, 2013) MMM had amassed a profit of $41,168, for an annual return of 15.63%. Maximum drawdown for MMM was $5,387. That’s a bit high, but I am considering this a long-term account that isn’t touched.

At the end of 10 years, the USDJPY had $54,361, for an annual return of 17.01%. The max drawdown for the currency was $4,748. That’s a little less than MMM.

[By the way, if you bought 232 shares of MMM in 2002 and decided to buy-and-hold, you would only have $15,630 of profit with a maximum drawdown potential of $15,000. And just for fun, if you decided to buy-and-hold the USDJPY for ten years, you would have lost $19,000. Please don’t buy-and-hold currencies!]

Overall, trading a currency would have made you more money and given you less drawdown. And that’s  if you traded only one currency. The problem with stocks is that you can only trade the amount of shares your account allows. If you have $10,000, then you can only trade a limited amount of shares. In currencies, you can easily trade up to eight currencies at once without raising your maximum drawdown substantially.

So, trading one currency alone is better than trading a stock. Trading eight currencies instead of one stock could make you eight times as much! Remember, that’s eight times the money for roughly the same drawdown.

Now, this comparison doesn’t take into consideration that you could pick an amazing stock that trades amazingly well, much better than MMM. But I would then ask: Where would you find this stock? How do you know ahead of time that the stock is amazing? What if it goes to zero? What if the company gets taken over? You could pick a Dow Stock and repeat these results pretty consistently without doing any research. To find that magical big winner, it would take a ton of research and even more luck.

There’s no doubt stocks are more fun. It’s not all that enjoyable telling people you trade currencies. You can only see that glazed, confused look so many times before you just stop telling people. Whereas, if you tell people you trade stocks, everyone immediately pictures you driving your convertible down a coastal highway with a supermodel.

If you want to make money, however, you might want to consider currencies.

You won’t have a supermodel, but you might be able to actually trade for a living.

Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.