Commodity and forex markets are among the most lucrative and exciting markets where you can trade. For the same reason, they are preferred by many. Now, whether you choose to trade in commodities or forex is entirely up to you. But before you do make a choice, it is imperative that you know the differences between them. Here are a few factors that will help you understand the differences between forex trading and commodities trading.
The key difference between commodity trading and forex trading is the product that is exchanged. In a commodity market, primary, unfinished goods like crude oil, wheat, coffee, rubber and gold among others, are traded through standardized exchange contracts. A forex or foreign exchange market is where currencies are traded. The purpose of a forex market is to enable smooth currency conversion through trading, either for profits or business.
In both the markets, the transactions are mostly financial and actual exchange of the physical commodity or currency takes place very rarely.
Another aspect in which the commodity and forex markets are dissimilar is regulation. While commodity markets and trading is highly regulated, forex markets are not as regulated. Even the little regulation that exists in the foreign exchange markets is often circumvented, a fact that makes many traders uncomfortable.
Finding information you need to learn about the forex markets and forex trading is easier when compared to finding information needed for commodity trading. There are a number of sites on the internet that offer forex education to those interested. Not only that, beginners can even sign up with a forex site to open a dummy account and practice forex trading before they invest real money in it.
Information about commodities traded, however, may not be readily available online. Also, the price trends in the commodity market are highly dependent on availability of the commodity, which depends on a number of factors including nature. To profit by trading commodities, a trader has to be keep track of related news about the commodity from around the world, which can be a bit tedious.
Hours of operation
The commodities market is like the equities or the derivatives market in terms of operation. Commodity trading can be done only during specified hours during weekdays. Forex markets are unlike most other markets and are open 24 hours a day, 5 days a week, which means forex trading can happen at any time during the five days of the week when the markets are open. Because of its long market hours, forex trading offers more opportunities than most other markets out there.
Volatility is more prevalent in the commodities and forex markets than it is in equities markets. Among the two, forex market is slightly less volatile than commodities market because the value of a currency depends on certain controllable political and economic conditions of the country, while the value of a commodity also depends on a number of unpredictable, uncontrollable natural events. The risk of loss due to crop failure caused by famine, storms or other natural calamities is high, which makes commodity markets so much more volatile.
Foreign exchange deals in currency and is therefore the most liquid market out there. Compared to selling commodity futures or physical commodities, selling currency is considerably much easier, and therefore a more lucrative option for many traders. Transactions that take place in the forex a market can go as high as 2 -3 trillion on any given day, whereas the commodity markets trade only a few billion or more on an average each day.
Leverage exists in both the markets, but it is better in forex markets than it is in commodity markets. In forex trading, you can have no doubts about getting leverage. With just a few hundreds of dollars, you can trade thousands for a profit.
Forex is more predictable
While you cannot entirely predict the outcome of a trade in any market, forex markets are slightly more predictable when compared to commodity markets. Like we discussed before, availability of commodities depends on natural phenomena which are unpredictable. Therefore, the risk of investing in commodity markets by guessing how they perform in the future is higher than the risk of investing in forex based on analyst predictions or estimations.