Forex vs Commodities Trading: 3 Key Differences to Consider
Forex and commodities trading can both be very lucrative, but which is best for you?
The advent of online trading platforms and brokerages has made trading accessible to the masses, with hundreds of such platforms allowing retail traders in most parts of the world to use their services.
Beginners now have access to an abundance of asset classes which they can trade, including currency pairs (Forex trading), commodities, equities and bonds, among others.
In this article, we will shed light on some of the key distinctions between Forex and commodities trading, and help you decide which is better suited to you.
Whether you’re accessing the market via derivative products (as with a spread betting trading account), or are trading the assets directly, you will find currency trading to have significantly lower fees than commodities trading.
In spread betting and contract for difference (CFD) trading, these fees are charged in the form of a spread – the difference between the “buy” quote and “sell” quote offered to you. The wider the spread, the higher the fees. READ: Spread Betting Guide: Benefits, Best Online Brokers and More For most commodities, you will typically be charged a spread of two to eight points, while in Forex trading you will typically be charged a spread of lower than one point. It should be noted that Forex spreads tend to be tighter on major currency pairs, such as the USD/JPY or GBP/EUR, than minor currency pairs, which are less widely traded.
The Forex market is by far the most liquid in the world, with trillions of dollars of currencies changing hands every day.
Liquidity when trading commodities varies heavily from commodity to commodity. For example, the market for Brent Crude oil is much more liquid than the market for pork bellies or phosphates.
More liquidity is a good thing, as it means there’s a steady stream of supply and demand in the market, so you can easily trade in and out of a position. Furthermore, greater liquidity often means tighter spreads and therefore lower trading fees.
Commodities are typically much more volatile than currencies, which means they experience larger price swings. This, on the face of it, may seem like a good thing, as you can generate larger returns if the market moves in your favour.
However, this high level of volatility means that commodities trading is often considered too high-risk for beginners, so it is advisable to first trade Forex and consider commodities trading later in your trading career.
You should bear in mind, however, that the level of volatility an asset experiences is dependent on an array of market factors, so you should always consider this when trading any asset and be prudent in your approach.
Which Broker Should You Use to Trade?
Picking the right broker and online trading platform is equally important for commodities and Forex trading. There are plenty of online brokers to choose from, but some are far superior to others, for reasons such as lower trading fees, faster execution and better reputation.
IG Index, a London-headquartered FCA-regulated spread betting broker, comes out on top in all departments.
Equities Daily recommends IG Index because:
They are one of the most established brokers in the world, serving hundreds of thousands of retail traders every year.
They are regulated by the Financial Conduct Authority (FCA), which means they have to follow stringent rules to protect your money.
Their trading fees are some of the lowest in the industry, across all asset classes, including crypto, Forex and stocks.
You can sign up for a live or demo trading account with them for free, in a matter of minutes.
They give traders access to thousands of different assets, from blue-chip stocks to investment-grade government bonds.
You can limit your max loss on an individual trade with IG Index by setting a stop loss.
As already touched upon, Forex trading is much better suited to novice traders than commodities trading. The lower fees and 24/7 market opening hours are great additional bonuses of currency trading. READ: Trading vs Investing: What’s the Difference? Most online brokerages, such as IG Index, give you the option of trading various asset classes, all from the same account. You can open a demo account and trade with paper money for free within a matter of seconds, and open a real account when you feel ready.
The Forex market is much larger and more liquid than the global commodities market.
Currency trading typically has lower trading fees and thinner spreads than commodities trading.
Commodities, such as oil and natural gas, usually experience much more price volatility than currency pairs.
This gives you greater earnings potential, but is also riskier.
Beginners are advised to start with Forex trading and only consider trading commodities later on in their trading journey.
Equities Daily recommends IG Index for currency and commodities trading, as they are trusted globally, have low trading fees and provide instant access to thousands of assets to trade.
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