The difference between Forex and commodity trading

The difference between forex and commodity trading is mainly the products being traded. The commodities market trades in raw materials such as coffee, cocoa and products such as gold and oil. The foreign exchange market, also known as the Forex market – is a global market where currencies such as the dollar, euro and yen are traded.

However, many of the strategies and analysis of the two markets mirror each other. Which market you prefer has a lot to do with your comfort level with the following factors.

Personal choice

Some people feel more comfortable with certain types of markets. Some traders like commodities because it is a physical market they can relate to. As many goods can be seen in everyday life, some traders prefer these raw materials because they can link to things like sugar cane and wheat.

Others prefer to trade currencies for other reasons, for example because they have a better understanding of macro events than the supply shocks that usually drive the price of commodities.

Differences in regulation

Commodity markets are very tightly regulated, while forex is less regulated. However, it is not to be regarded as the Wild West. There are, of course, rules for offering forex trading, but it is much looser. The more serious traders feel they are better off with the government on their side. For this reason, it is best to always trade forex, commodities or shares with a broker who is regulated by at least one authority.

Leverage in the foreign exchange market and foreign exchange market

Although there is leverage in both markets, there is usually a higher amount of leverage in the forex market, the normal one offered is a leverage of 30 x for major currency pairs. For commodities, a lower leverage of 20x is more common. All you do is fund your account with a few hundred dollars and you can check thousands of dollars worth of underlying values. While leverage is also an option in commodity markets, leverage in forex trading is much more spectacular.

Exchange limits

Commodities are traded on exchanges while foreign currencies are traded over the counter (OTC). The foreign exchange market is not centralized and therefore trading takes place either on the interbank market or through individual brokers.

By trading on an exchange, commodities have daily interval limits. When these limits are exceeded, the markets are said to be limit up or limit down and no buy or sell orders can be placed. If you are a commodity trader on the wrong side of one of these restrictions, you basically see your account disappear without having the ability to act.

While rapid losses can also occur in the forex market, there are very few cases where you absolutely cannot exit your trade, as can happen with stock exchange limits and commodity markets.

Compromise

A trader looking for a compromise can trade in commodity-based currencies. These currencies include, among others, the Australian dollar, the Canadian dollar and the New Zealand dollar. Historically, the Australian dollar has a positive correlation with the price of Spot Gold (although the strength of the correlation varies over time).

The milk-dependent New Zealand economy has a similar positive correlation with whole milk powder prices. Finally, the Canadian dollar has a positive correlation with the price of crude oil. This also applies to some extent to the Norwegian krone.

Therefore, the Canadian dollar has similarly seen strong movements with the strong oil trends from 2014 to 2016, and the same can be said of the Mexican peso.

The Brazilian real also has a strong link to commodities. In Brazil, oil, corn, coffee, soybeans, cattle, etc. are all commodities that are traded on commodity exchanges around the world.

Another subset of the foreign exchange market is currencies of emerging market countries. Emerging markets also reflect commodity growth and tend to have an inverse correlation with the US dollar. Commodity currencies also have higher rollovers than developed market currencies, known as majors. Therefore, in the right market, emerging market currencies can be a nice complement to the volatility seen in commodity trading.

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