Commodity Trading Basics
by 5paisa Research Team Last Updated: 2022-03-23T14:10:42+05:30


The equity market has always been the most talked about in India, and the value of commodity and forex trading is often understated. This scenario heavily contradicts global trends where forex and commodity markets witness higher turnover rates than equities.

However, these markets are slowly gaining steam too. While commodities and forex trading both share similarities and differences, it's up to the traders to analyze which market is ideal for them.

Commodity Trading Vs Forex Trading

Forex trading analyses if a nation's currency will go up or down in the face of another major currency. As such, forex is traded in currency pairs. In trading commodities, traders determine whether the price of a certain commodity will go up or down based on several factors concerning the environment.

The constant change in weather can shake up the commodities market at any point in time. Even if the weather is fine, other events such as strikes by miners, new mineral discoveries, wars, etc., can shift the paradigm of the commodities market. Even the forex market can be affected by global events like trade flows, tourism, and geopolitical situations. However, these events have a less dramatic effect on the trader's portfolio than the commodities.

Which One to Trade - Forex vs Commodities?

Some traders may find forex to be complex and commodity trading easier to understand. Even though commodities are easier to connect with, it doesn't automatically mean it'll be easier to trade. Both forex and commodities require an investment of time, capital, and learning. Both have risks associated with them, and both take you through a high learning curve if you are an amateur trader.

Consider the following factors when you choose between commodity vs forex trading -

How Much Capital Do You Need to Allocate?

In both, it's important to only trade with money that you can afford to lose. You can initiate a forex broker account and trade with a few hundred dollars for forex trading. However, you would need more capital in order to trade commodities.

How Much Risk Is Involved?

Trading both commodities vs forex is risky. However, forex trades are comparatively easier to manage if the forex charts go pear-shaped.

How Much Time Do You Need to Trade?

Traders need to do some homework on their part to trade in either. For commodities, research into supply and demand is needed. Further, a peek into the country's economy and the growth of the population may help.

For forex, traders first need to decide which currency pairs they wish to trade and then do analysis on both. Analysis from a technical point of view shows what is happening on their charts and overall analysis points to both countries' economic activities.

No surprise that these analyses take time and effort. You can't cut corners into this without facing losses. The key is to invest a couple of hours per day and look for a viable entry point for your trade. This applies to both commodity and forex.

Differences in Regulation Between Forex vs Commodities

Another difference to factor in is the market limits. Commodities are traded on an exchange and are strictly regulated by Governing Financial bodies. This means the daily market limits cap trading in commodities.

On the other hand, forex is traded over the counter, through brokers or interbank, and has few regulations. Once the limit is exceeded on the commodity market, no more trades can be placed, and you could end up completely powerless.

Differences in Leverage Between Forex vs Commodities

Leverage means depositing a small amount of capital and then borrowing capital to make higher trades if you plan on using leverage while trading. This is an important factor for you to consider. In forex trading, leverage is widely available. Brokers can offer leverage options to budding traders without checking into their financial history.

Leverage is available even in commodity trading, but it is not as easy to get. Leverage in the commodity market is also not as significant as the levels of leverage that forex traders get offered by forex brokers.

Differences in Exchange Limits Between Forex vs Commodities

As mentioned above, commodity exchange has daily market limits. Exceeding those limits and watching your account get empty is not a good position to be in and should be avoided at all costs.

You can incur losses in forex just as quickly. However, the key difference here is the control over your trades. You have better control through which you can instantly close down your trades.

However, over-leveraging your forex account gives your broker the rights to close your open trades to prevent negative losses. The broker would send a margin call asking traders to either close trades or add more funds or do both.

Commodity Trading vs Forex Trading - The Bottom Line

All kinds of traders have several options of financial instruments to invest in. Forex vs commodity trading holds different levels of complexities. However, in a realistic sense, neither of them is easy.

Commodity trading is dynamic in response to the demand and supply of the said commodity. Forex currency pairs can be equally dynamic as they react to economic news. No matter what you choose, market liquidity is essential. In case of low liquidity, your trades may not get fulfilled, or they may only get filled partially. In the forex vs commodities debate, make sure you seek a market with high liquidity.

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