Trading In Forex Or Commodities – Pros And Cons Of Each

Since the stock market meltdown in 2008, many investors are turning to alternate trading options such as the Forex and futures or commodities. While these new, more volatile markets can provide a quick return, there are also some risks involved.

Forex

The Forex is considered the world’s largest financial market.  The daily average trade volume exceeds $4 trillion and involves currencies from all over the world. There is no central marketplace for the Forex. Instead, all trades are conducted through a broker. The market is open 24 hours a day, seven days a week and trading is conducted during the entire time and anywhere in the world. There are also no minimum commissions charged by brokers conducting a Forex trade and these trades are executed very quickly.  Since trades are done so quickly, this provides some stability in pricing during the trading activity.  When you are trading in commodities or futures, there is no way to know, with certainty the price you are paying until the contract is purchased. Commodities or futures brokers will normally price a contract in terms of the last trade, but this may not be the price when the contract is finalized.
Forex vs Commodities
Commodities

A commodities or futures contract is called a derivative.  Two traders agree on a particular price for a commodity in the future.  When a buyer invests in a commodities contract, he is agreeing to pay the seller for a commodity that has not yet been produced. The buyer is agreeing to pay a set, fixed price for that commodity, even if the seller loses money once the commodity is produced.

The futures market is small compared to the Forex market.  The trades average about $30 billion daily.  The market is fairly liquid, but there is also significant risk in trading in futures. Since trades are not always immediately executed, it can be difficult to know exactly how much to buy or sell.

Considerations

Forex is a simpler investment tool than futures and still provides a great deal of profit potential.  The Forex is very liquid and it is much easier for a trader to ascertain the price paid since trades are executed so quickly. It is also generally very easy for a trader to liquidate a position because trading is happening throughout the world all the time.

There is an abundance of trading choices with futures.  In Forex trading, there are only certain currency pairs which may be traded, while, in the futures market, there are many different options. This makes it both easier and harder since it may be easier to find a commodity to trade in, but hard to tell which one will produce the best profit. Most people who are trading on the Forex market will trade in the four primary currency pairs. These are the Euro/Dollar, the British pound sterling/Dollar, the Dollar/Japanese yen, and the Dollar/Swiss franc. Commodities include agriculture crops, energy, precious metals, livestock, and softs. Softs consist of products such as cocoa, cotton, coffee, lumber, sugar and orange juice.

When a trader is deciding between the Forex and commodities, their tolerance for risk and the size of their trading account will be important factors in their decision. Whichever they choose, the Forex or commodities, they are assured of an interesting trade environment.

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