Trading with Commodities Compared to Forex Currency Trading
There is a whole range of different commodities that can be traded in the financial world. Most of the private investors and retail traders tend to stick to only one or two markets when it comes to commodities. Prices of commodities going up or down affects our day-to-day activities. To put things in perspective, Anyone who drives a car would be impacted by rising crude oil price or a weather prediction of under average rainfall affects the crop production and in turn, the price of our next meal. A commodity market facilitates trading in various such commodities.
Commodities in the market are largely divided into three groups. Metals, Agricultural produce, and Energy. The metal is further classified into non-precious metals, like, iron, steel, aluminum, copper, and Precious metals such as Gold, Silver, Platinum, and Palladium. Agricultural produce is called Soft Commodities As the name suggests, it includes coffee, cocoa, wheat, corn, and so on.
The futures market is the most direct and popular way to participate in commodity trading. On the other hand, you may participate in commodity trading indirectly by buying or selling equities that are tied to commodities in some manner. In this article, we will further analyze what commodities are, how they are traded, and what is the major difference between Commodities VS Forex market.
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As we have already mentioned, there usually are plenty of commodities but in the markets, they are generally broken down into several types. The first type is Metals. Metals include non-precious metals, LEDs, copper, nickel, and aluminum. It should be noted that those metals are commonly used by manufacturers and so on. So there is a market for trading large quantities of those non-precious metals.
Another type of commodity includes precious metals. Precious metals can be broken down not by what you think is valuable but actually by the market jargon and convention. So the precious metals are Gold, Silver, Platinum, and Palladium. Metals are also known quite often as hard commodities for obvious reasons. Actually, in London, there is an exchange that specializes largely in trading some of these metals.
Another commodities type is agricultural commodities and a lot of people would call them ”Softs”. There is a big market for buying and selling the likes of cocoa, sugar, coffee, and so on. Those are agricultural or soft commodities.
While talking about how commodity trading works it should be mentioned that there is also another type of commodity which is Energy. This category includes oil, gas, and so on. The important thing is that there are not prescriptive definitions of commodities but these labels are used quite often to describe groups of particular commodities and each of them has slightly different and different markets in terms of where they are traded and obviously slightly different users in terms of buyers and sellers.
Before you dive into commodities you certainly need to know a little bit about what makes a commodity different. The major thing that you should probably know is that buying and selling commodities is not the same as buying and selling shares, bonds, or currencies.
There are some of the key sorts of features we need to look out for in the commodities markets. Those features explain in a nutshell why the commodities market is quite a high-risk place. Prices can be volatile and this is because of the mixture with commodities. There are a lot of different components that affect the prices of different commodities.
Most Traded Commodities in The World
Before explaining Commodities vs Forex which is better, it should be noted that one of the most traded commodities is considered to be Crude Oil. It is hardly unexpected given the high level of global demand and the extent at which our energy usage in our quickly developing and industrializing economy is spinning out of control. There will always be a compelling need for energy and fuel sources.
Another commodity that should be mentioned here is Coffee. With over 2.25 billion cups of coffee drunk globally every day, coffee is considered to be the world’s second most traded commodity, trailing only crude oil—and also one of the oldest ones too.
The third most popular commodity throughout the world is Natural Gas. Natural gas is without a question one of the most heavily traded commodities in the world since it is a source of energy and fuel utilized for nearly everything, despite increased attempts to shift toward renewable energy sources.
On top of that, it should also be stated that throughout history, gold has been regarded as a precious and valuable metal, particularly among investors, owing to its constantly growing value in recent years. Another commodity that should be considered after Gold is Silver. Historically, silver has been a secure investment as well as a source of stability in investment portfolios. It is utilized in high precision medical equipment and industrial operations, in addition to its visual beauty.
How are Commodities Traded?
In order to analyze commodities vs Forex which is more profitable, there are some things that should be taken into consideration. First of all, commodity trading is one of the oldest forms of activity, yet it is also one of the most widely misunderstood. Commodity trading or investing involves more specialized expertise and may involve more risk than more well-known assets, but it also provides investors with unique chances to trade and gain from shifting prices.
As we have already mentioned earlier, there are three types of commodities including Metals, Agricultural produce, and Energy.
In reality, very few traders appear to be equally capable of trading all commodities markets. As a result, you must carve out your own niche and dominate a particular market. Get acquainted with and understand the intricacies of your niche commodity since this is the first step in developing a successful commodities trading strategy. Finding your market is just a question of determining the market you are most comfortable trading in.
It should also be emphasized that commodities exhibit significant cyclical patterns. Besides, Commodity prices are determined by the supply and demand law. The combination of supply and demand can result in the creation of both bullish and bearish trends. In general, continuous times of strong demand or limited supply control a market, driving prices upwards, whereas prolonged periods of oversupply or lack of demand bring prices downwards. As a result, the values of commodities fluctuate significantly above or below th