Commodity trading , like Forex trading, is becoming a very popular financial market for individual investors throughout the world.
In this article, we’ll be looking at the similarities and differences between commodities and Forex to see whether the skills you gain from one market can be cross credited and used in the other.
Remember any type of financial trading involves risk, so you should definitely read all about the different risks that each of these markets incurs, before investing a cent.
Money Required for Commodities
When trading Forex, you can usually open an account with as little as $100. This is because Forex trades are significantly leveraged, and therefore you can use money which you haven’t got to place each trade. The returns are magnified in this case, but so are the losses.
When it comes to commodities, the initial capital requirement is a lot higher. In many cases, you will be required to front up with a few thousand dollars to open an account, and as much as $10,000 to actually place a worthwhile trade.
Why is this? Well, the commodities market is significantly different to the Forex market. The key differences you will find are:
- Lot sizes are fixed and non-negotiable.
- Margin/leverage allowances are less than usual.
- Markets are open at different times.
- Trading requires knowledge of how futures work.
Clearly, Forex and futures are not the same. To get a better idea of the differences, let’s go into a bit of detail to see how futures trading works.
How Futures Trading Works
A “future” is a contract which ultimately will be settled in the future. For example, let’s take the commodity of wheat. There is no “spot market” for wheat, as you would find in Forex. Instead, there are specific contracts for wheat which will mature on a particular date, and award the holder of the contract a particular quantity of wheat.
There are a number of different delivery dates, usually being once per month. For example, there will be a March delivery and an April delivery, and each of these will be priced differently based on the expected price of wheat at that date.
Hence unlike Forex, it is up to the trader not only to choose the expected direction of the market but also to choose how long they think it will take for the price to move in that direction.