Forex, Stocks, Commodities: Differences Between 3 Trading Types
May 27, 2020
Forex, Stocks, and Commodities. Three different markets, characterized by some profound differences, and requiring a certain specialization to be mastered at best. This forces the trader to make a choice from the beginning and for the long term. Those approaching trading must decide whether to focus on Forex, stocks, or commodities. Without considering, of course, other markets. However, we mention these because they are the most frequented overall.
In the following article, we offer some tools to orient oneself in this choice. A choice that, as we will see in the next paragraph, can also be rather complicated.
Forex, Stocks, Commodities: Which is the Best Market?
The budding trader, or rather the one who has not yet started investing, most likely has not yet developed a specific preference for this or that asset class. It's absolutely normal, since from the outside the choice may seem arbitrary. Therefore, their goal is simply to aim for the most profitable market, the one that offers the greatest gains with the least effort.
Which of the three markets fits this profile? In short, who wins the match between Forex, stocks, and commodities? It's really difficult to answer this question. So, it's better to put your hands up: it's impossible to award the palm of the "best market". The issue is much more complex than one might think, since each market has its pros and cons, its peculiarities and distinctive features. They show a certain compatibility with specific trading styles, rather than others. Therefore, the choice is up to the trader, and only the trader. In short, it is subjective.
Even choosing based on one's subjectivity can be complicated. Hence, the need firstly to know one's needs and review one's approach, secondly to have an in-depth knowledge of the markets in question. The next paragraphs will help you develop the right knowledge about Forex, stocks, and commodities. We propose a comparative analysis, taking into account important criteria such as technical analysis, fundamental analysis, the strategic component, and the operational component.
Technical Analysis
Technical analysis is a fundamental activity. It allows you to develop a certain awareness of the market, to understand in which direction it is going. It also allows you to draw useful elements for order composition, as well as to gather information as plausible as possible about the future of the market itself. We can compare it to an in-depth study of prices that refers to statistical models, based on the concept of "history repeating itself". In a nutshell, given event A, the reaction will always be B; given event C, the reaction will always be D, and so on.
The activity of technical analysis follows a similar pattern from market to market. Similar, indeed, but not identical. In fact, even in this aspect, there are some important differences. They mainly concern the reactivity to prices with respect to the internal dynamics of the market, i.e. the exchanges. In fact, technical analysis can only detect these dynamics and no others. For example, it says nothing about the impact of economic events, which are precisely the domain of fundamental analysis (we will dedicate the next paragraph to it).
Another element to consider is liquidity. The more liquid the market, the lower the impact of large investors. If the impact is large, the balance would shift in an almost arbitrary and therefore less predictable way, at least from technical analysis.
Let's start with Forex. How susceptible are prices to trading? Well, very but not very much. Technical analysis is able to capture most of the movements, but not all. In fact, some of these are caused exclusively by external factors. Technical analysis, however, fully retains its role. As for liquidity, on the other hand, there is little to say: Forex is the most liquid market in the world, so at least in theory the impact of the "big guys" is limited, and certainly does not invalidate - with a few exceptions - the evidence of technical analysis.
The discourse is partially different for stocks. The vast majority of prices are in fact caused by internal dynamics, by exchanges, which in this market are always heated. After all, the stock market is synonymous with speculative investment. Therefore, technical analysis is in this case an essential activity. As for liquidity, the stock market is also doing well, very well indeed, although it is not able to steal the scepter from Forex. Therefore, the impact of large investors is noticeable, but rarely affects post-technical analysis assessments.
The discourse is quite different for commodities. Of course, making a generalization is complicated in this case, since commodities are numerous, and each has its own specificity. However, they have some common characteristics. For example, dependence on external factors. After all, we are talking about commodities, therefore materials that serve a purpose, that represent a function of other activities. Liquidity is also lower than stocks and Forex, although it is still abundant.
Fundamental Analysis
Fundamental analysis is the study of economic, political, and social events that can impact prices. The purpose is precisely to anticipate the impact and act accordingly. Also in this case, we are dealing with an activity that is both cognitive and predictive. And also in this case there are differences in approach from one market to another. The issue concerns the "ease" in the practice of technical analysis, i.e. the stability of the relationship between prices and market movers (i.e. impacting events).
Let's start with Forex. The market movers of Forex are first of all the periodic appointments concerning monetary policy, such as the meetings of the central banks called to decide interest rates. Important market movers are also the publications of data on the real economy, since a currency is always an expression of at least one economic system. The same goes for political systems: news of international resonance concerning a country can move the price of its currency. Well, the link between these market movers and prices is quite solid, although not rock solid. For example, the announcement of the collapse of GDP is often followed by a more or less large devaluation of the corresponding currency.
As for stocks, the discourse is similar. In this case, the market movers concern the real economy, i.e. its performance. Fundamental analysis, however, follows particular dynamics due to the specificity of each individual stock. For example, looking at production data is important if you are trading a stock issued by a large industrial group, while it is almost useless if you are trading a stock related to a service or telecommunications company.
The discourse is even more complicated for commodities. In fact, commodities depend almost exclusively on external events. However, what moves their prices are mainly extemporaneous events. For example, the explosion of geopolitical tensions for oil, or a natural disaster (as there are always every year) for cocoa and so on. Therefore, fundamental analysis is at the same time necessary and difficult.
Strategy and Operation
There are two other points to analyze, always from a comparative perspective: strategy and operation. In this regard, we can examine elements such as the supply of assets and price volatility. The first affects the degree of customization available to the trader, the possibility for them to identify a space that meets their needs. Volatility, on the other hand, affects the general difficulty in managing operations. It is obvious: if an asset is volatile, it is much more difficult to manage, especially when you are in the market (i.e. when you have an open position).
Let's start also in this case with Forex. The supply of assets is wide but not very wide. In parentheses, we are talking about currency pairs, since the price of a currency can only be established in relation to another. Currencies, all over the world, are very few hundreds, some of which are not at all significant for trading. Therefore, the basket narrows, and it is not so full. It depends, then, on the broker's possibilities, which could be limited to a few currency pairs (even less than ten). As for volatility, Forex presents average values, oscillations wide enough to ensure profit opportunities but rarely able to invalidate any analysis activity.
Moving on to stocks, the discourse becomes more complicated. Stocks are very volatile, also because they are often involved in dynamics of a psychological nature. The term "panic on the stock market" has entered the collective imagination. In periods of relative calm, the oscillations are contained, but this balance risks breaking with a certain frequency. Nothing to complain about, however, on the offer: it is practically endless. There are thousands and thousands, indeed tens of thousands of companies listed on the stock exchange, so there is only the embarrassment of choice. Any trader, even the most demanding and "particular", can find their niche and thrive.
Finally, commodities. Here the oscillations are important, even if rarely at the level of stocks. The offer, on the other hand, is quite restricted, more than in Forex. The available assets can be counted on the fingers of one hand, especially if precious metals are excluded from the count: cocoa, coffee, sugar, wheat, oil, gas and a few others. This could cause some problems in the selection phase, also because it is not certain that a trader's needs coincide with one of the few assets available.
Readability
By the term readability we mean the quantity and quality of news available to the trader, which can be used as a guide to process orders.
As for Forex, we are at optimal levels. The investment volumes and liquidity are at the top, so the market attracts the interest of many investors. Consequently, there is an abundance of papers and analyses, even daily ones, concerning the dollar, the euro, the pound, etc. Obviously, it is necessary to know how to choose, and distinguish between interesting content and background noise.
The same goes for stocks. Indeed, they are considered the market par excellence (more by legacy than by real importance), so also in this case there is an abundance of documents, content and analysis that help to understand the market. However, there is a certain specialization towards a restricted basket of stock titles (the most famous and with the highest capitalization).
Different discourse, however, for commodities. If we exclude oil and gas, which however indicate a certain lack of information compared to stocks and Forex, the other assets are considered a bit too niche to justify a sustained production of analytical material.
