Commodities and forex belong to the same family of the financial market but exhibit different characteristics, fundamentals and methods of trading. Both are essential parts of trading. One is used to channelise economies, while other bags requirement of people for a living.
Interestingly, money buys commodities. It is the exchange of an essential product against a few bucks. Also, some specific financial bazaars and markets determine the value of different currencies and commodities. Both instruments have global acceptance.
Products in commodities:– These may include, corn, cocoa, sugar, coffee, oil, cotton, silver, gold, platinum, palladium, rice, oats, soybean, wheat, livestock animals, and other products that are essential for living.
Commodity markets:– Globally, commodities are getting traded in fifty most tradeable markets. The markets offer facilities to traders and investors for investing in more than a hundred types of commodities. A futures contract is considered the most reasonable way to make a leeway into the market.
The contract bounds a trader to buy and sell certain commodities within a purview at a specified rate in the future. Commodity trading comprises of three different players:-
Mild speculators: These individual traders require a broker for trading in the market. Also, they use their accounts for the same. It can make an unprecedented impact on the market.
Commercials:– These are involved in merchandising and processing of a commodity. They market it and try to influence the public for investment.
Big spectators:- These investors have gained and hoarded capitals with years of experiences. They know how to make better gains by minimising the risk.
Benefits of commodity trading
- It has lower transaction rates compared to other instruments.
- Investors are entitled to the exposure of markets worldwide.
- Carry traders are more effective and potent here than anywhere else.
- Makes for diversifying portfolios for a trader.
The trading hours are longer here after forex, that allows traders to hold their assets for a longer time and make maximum gains.
For industrialists, it is quite beneficial as they can control the rising price by making a bulk purchase. It is the raw material that overpowers the final rate. Stopping a sudden hike in the price and bringing them down can make it an attractive buy for customers.
Hedge during fluctuations of pricing is one advantage that subsides other. Today,
Assets in Forex:- There are essentially different currencies of the world including dollar, yen, pound sterling, euro, rupee and several others. It is the market know for its liquidity nature. Bidding, buying and selling do not involve much time. It happens in microseconds due to high volumes and most notably due to trust of the traders on it.
Even with marginal differences, quest of traders changes in the foreign exchange currency markets. The best currency pairs include:
EUR/USD, NZD/USD, USD/CAD, GBP/USD, USD/JPY, and USD/CHF. These are among major pairs that bargain maximum number of investment and volumes from traders globally.
Major pairs:- The global foreign exchange markets are driven and channelised by the top or major forex currencies. They have significantly huge traffics and sentimental value attached to them. Among these NZD/USD, USD/CAD and AUD/USD are considered as commodity pairs.
British Pound, Japanese Yen, Swiss Franc, US dollar and European Euro are among the most potent currencies that traders fancy and draw maximum profits.
Interestingly, EUR/USD holds the forex market’s twenty per cent stakes. Thus, becoming the most aggressively traded currency pair among all. The USD/JPY comes on the second spot distantly, while GBP/USD scores the third-ranking and USD/CHF is on fourth.
Reasons For Trading Bigger Currencies And Pairs
A superhit star ensures the flocking of the crowd at the theatres. Likewise, the best currencies beget more volumes that translate into bigger profits. It is the factor of common sense and business ideology that drives traffic toward the currency trade.
The spreads between asking and bidding prices are lesser. Hence, exotic pairs have higher spreads compared to the majors. Also, the latter have huge volumes, which eventually attract lots of traders at their disposal.
High volumes offer a possibility of exiting and entering the market at any given time with comfort.
On the other hand, it is a mammoth task to sell, buy and bid in pairs with lower volumes. An investor cannot even buy a large position in them unless there’s a tectonic movement of a significance pushing prices to motion.
The high volumes also indicate that more people are willing to take chances with currency pairs and currencies. It means people have a better chance of drawing a resultant outcome, most probably in their favour. But it is the matter of prediction that requires some experience by people. It does not happen overnight but solicits a fierce amount of patience and ability to learn.
Determination Of Major Pairs
Supply and demand are the primary contributors for any asset or currency pairs to perform well. They are the ones who determine rates or prices of currencies and their different pairs. Otherwise, they are like free-will, floating freely.
Central banks may step in sometimes to stop from the market from getting corrupted due to excess of price movements and causing harm to investors. It prevents too much or fall and rise or fluctuations at times.
Reasons causing frequency and fluctuations of currencies
Prices of currencies depend on several elements and factors that may be related to a country’s economic performance, elections, chaos, development, improvement in traders, demand in good and products, great imports and exports, current positions, interest rates, policies, future plans and expectations, fundamentals and other pre-requisitive and prerogatives.
Top Benefits Of Forex Trading
1.No one has ownership:– Provided the massive size of the forex market, which goes past the daily trades of USD 5 trillion, no one can establish supremacy over it. That goes beyond once ability to even dream about getting hold of the market, as it would mean ruling over the world economy and owning every asset, manufacturing, units and import-export of goods. It is decentralised. Hence no middlemen are controlling it.
2.Trade lows and highs: The condition of the market does not matter here. Traders can invest even if the market plunges all-time low or high. It is a matter of prediction and guessing through research and expert analysis.
The market has the power or calibrating and balancing things out. If timed right with anticipation, traders can draw advantage of the market. Several trading opportunities can be picked by investors irrespective of the trading they prefer to perform (long term or day).
3.Runs for 24 hours:– It is the only market that functions for all hours of the day without a glitch of sleep, five days a week. It empowers a trader beyond the dictation of the market. They can choose when and how to trade. There are no bells or specific time as to when to bid and close the trade of the day.
The trading initiates with Sydney session and continues until the New York one, and then the cycle keeps on restarting, round the clock. It means people can choose their schedules for trading.
4.High leveraging: Investors with a handful of funds can dream big in the forex market and change the way they want to through leverage technique. However, it induces high risk, but if performed in a controlled manner, there is no better path to gain maximum profits. Through this, a trader borrows x time more funds compared to deposited ones from a broker for investing in the most liquid market. And when things go right, with strategies in place, gains rise exponentially.
5.Available to all: Indiscriminatory, the forex market is open to everyone. Anyone who wishes to trade in the volatile market can charge their funds in and start trading. One does not need huge funds or the treasury to begin it. Even without much capital, foreign currency exchanges are available to those who want and need them. If one is a skilled trader, then it wouldn’t take much time to catapult that.
Commodities trading vs currency trading
On several fronts, commodity trading is distinct from currency trading, but on some platforms, they have many similarities that bound them together. Similar to forex trading, one can use futures on the commodity for speculating on the market for short-term motions and movements. Here is some more commodity currency correlation.
Traders can benefits through arbitrage in commodities and forex trading.
Possibilities of earning high returns on varied exchange rates are applicable in foreign exchange and commodity. It is applied to the difference between the price of exchange in different markets.
Differences Between Commodities And Forex Markets
Besides similarities, there are some differences between the financial markets which set them apart and unique from each other.
Commodities have heavy regulation for it involves essential products without which life isn’t possible. Apart from luxury products like gold, platinum and silver, edible goods like wheat, corn, sugar, coffee etc. are necessary for living.
Both markets offer provisions of leverage and margin, but the currency market has it higher compared to the commodity one. It is for keeping a bar on life-essential products.
The forex market is regulated loosely compared to the commodity one.
Commodities trade through exchanges, while there is an option to trade forex through over the counter.
Conclusion:-
Commodity and forex trading are not just phenomenons but the heart and soul of the financial market. They channelise the trade over the world. Currencies are the medium to purchase and sell goods, while commodities are products that are traded through foreign exchange money. The world economy is largely dependent on these two aspects besides other types of markets that exist.
Moreover, they invite diversification of portfolios and options to think beyond the traditional way of investment and trading. The exposure to global markets here is unparalleled. Hence, commodities trading vs currency trading is not a superficial term, but there is a bigger picture behind it which needs exploration, digging and a scientific study.
