Difference Between Forex and Commodity Trading
Many traders would like to find out if commodity trading is better than trading in foreign exchange (forex). The products or tradable securities are the main Difference Between Forex and Commodity Trading. Commodity markets trade in agro products like cocoa, coffee, cotton, and mined products like oil and gold. The forex market which is often further abbreviated to FX trades in the currencies of different countries like dollars, euros, yen, and is global. The approach to trading and analysis in these markets are similar. However, some of the factors which can help the trader to decide which market he prefers to trade in are discussed below.
Some traders are more comfortable dealing in specific kinds of markets. These traders prefer commodities since they are physical products that they understand better. Many of these commodities are also being used in daily life, so traders can get information more easily. I know my college traders that are experts for EURUSD, some of them know excellent British economy and trade only GBPUSD, and some like to trade oil or only gold.
What is the difference between Stock, Commodity, Forex?
Stocks traders trade equity securities and they purchase and sell shares of different companies and try to profit off from stock price fluctuations. Commodity traders trade and invest in physical substances. Forex or foreign exchange is a global marketplace for exchanging national currencies against one another.
One of the differences in the regulation of the market for currency and commodity trading. The forex markets have not so strict regulations when compared to the highly regulated commodities market. Though there are some regulations for forex, these are not strictly enforced, and traders, brokers bypass these rules. So some traders prefer to trade in a market that is regulated by the government and their assets are safe.
Forex traders can easily get access to a large amount of leverage while trading in forex when they open their account with a forex broker and add funds to the account. Though some leverage is available in the commodities market, it is far less than the leverage for forex trading.
Exchanges for trading
The commodities are traded on the exchange, while the forex trades are finalized over the counter with the help of forex brokers, or through the interbank market. Since they are traded on the exchange, there are limits to the daily range for the commodities traded on the exchange. After the limit is reached, the market has reached its limit down or up, and no further trades allowed for the commodity. If a commodity trader has placed a trade which is adversely affected by the exchange limit, it could result in losses, since the prices will remain the same.
Though a trader can also make losses in Forex, they are usually able to exit the trade, whenever they wish, unlike the commodity markets where exchange limits are implemented.
A trader who wishes to get the advantages of both forex and commodity trading can opt for trading in commodity-based currencies. For example, the Australian dollar is positively correlated to the price of spot gold, though the correlation strength may fluctuate. Similarly, the economy of New Zealand depends on the dairy sector, and its currency is correlated to the prices of whole milk powder. The Canadian dollar is correlated to crude oil prices, and when prices of oil increased from 2014 to 2016, the value of the Canadian dollar also increased.
So the question is: forex or commodities – what is better for trading? Both markets are excellent and offer a huge opportunity. The trader only needs to specialize in some market (either fx and commodities or stocks or only some types of stocks or currency pairs) and this is it.
Can we compare stock commodity forex? Yes, we can. All markets have similarities (technical analysis, charts, trading theory…) and there are differences such as trading hours, regulation, number of instruments, leverage, etc.
For example below is comparison of forex and stocks:
The currencies of emerging markets are also linked to growth in commodity prices and are inversely correlated with the US dollar. These currencies have a high rollover, and trading these currencies can help offset the volatility observed for commodity trading.