For those who are thinking about starting Forex, or for those who have started Forex but do not fully understand it, I will explain what Forex is in the first place, how it will be profitable, risks, and things to be aware of. It also explains the terms you need to know and how to open an account when starting Forex, so please understand the basic knowledge before starting actual trading.
What is Forex? Briefly explain how it works
FX is an abbreviation for Foreign Exchange and refers to foreign exchange margin trading in Japanese. Funds are deposited with a Forex company as margin = collateral and based on that, the currencies of the two countries are exchanged and traded.
In this way, you can sell the dollar and buy the yen suddenly because you trade based on the margin money.
In addition, by using a mechanism called to leverage that can be operated with an amount greater than the principal, it is possible to trade a large trading volume with fewer funds than other investment products. Against this background, it is recognized in the market as one of the methods with good capital efficiency.
Conversely, by using this property to reduce the trading volume, it is possible to limit the possible loss and hedge the risk, so it can be said that such a high degree of strategic freedom is one of the attractions.
24 hours trading is available
FX can be traded almost 24 hours a day from 7:00 am on Monday to 6:00 am on Saturday Japan time, excluding weekends and holidays.
The foreign exchange market starts in the Oceania region in the morning of Japan time, moves to the Sydney market, the Tokyo market, the London market in Europe, and finally the New York market. Foreign exchange players are trading in each market, sometimes buying and selling Japanese yen during London time, and buying and selling dollars during Oceania time.
As a result, the foreign exchange market is open for most of the day.
In addition, one of the major advantages is that the currency can be switched flexibly depending on the time of day, as the price of the currency used in the country (e.g., the United States in the case of the dollar) is active during the daytime hours. is one. By the way, the ○○ market represents a place with a large trading volume during that time period. Therefore, trading hours for each market are not clearly defined.
No basic transaction fees
In Forex, there is a difference between the selling and buying rates at the time of trading (this difference is called the spread), and the difference between these rates is the actual commission.
There are almost no FX companies that collect commissions other than this spread. This spread is also always visible on the order screen, so simple cost calculation is possible.
However, some FX companies charge an account maintenance fee if you do not trade for a certain period of time.
How do you get profit or loss in forex?
In order to manage assets in Forex, let's firmly hold down the mechanism that produces profits and losses.
If you do not fully understand how profits and losses are generated, I would like you to firmly grasp the exchange gains and losses and swap points explained here.
Foreign exchange gain/loss
swap point
Foreign exchange gain/loss
Exchange gain or loss is the profit or loss caused by price fluctuations between different currencies.
For example, if you buy 1 dollar at 100 yen, and the exchange rate falls to 90 yen in the direction of yen appreciation due to social conditions and economic policies, you will have a foreign exchange loss of 10 yen, and the yen will depreciate. If it rises to 110 yen, it will turn into a foreign exchange gain (exchange gain).
Since FX does not actually hold the currency, it is assumed that the FX company "has the currency" based on the trader's order, and only the amount generated by the exchange gain or loss is transferred to the actual funds. We have adopted a mechanism called "cash settlement" that reflects the difference.
Therefore, it is possible to place an order called a “short sale”, which assumes that the currency has been sold from the beginning.
swap point
FX-specific swap points are a mechanism for adjusting the difference in interest rates set for the currencies of two countries.
For example, if you sell the yen with a low-interest rate and buy emerging country currencies such as the Turkish lira or the South African rand with a high-interest rate, you will be given an interest rate called swap points every day according to the amount of currency you hold.
On the other hand, in the opposite case, the difference will be collected from the FX company, so if you hold for a long time, check in advance how much interest rate difference will occur.
Turkish lira
Mexican peso
South African rand
What is leverage is a major feature in FX?
Leverage is a mechanism that allows you to trade many times the amount deposited as margin. In the case of spot trading such as foreign currency deposits, if you have 100,000 yen in Japanese yen, you can only buy 100,000 yen worth of foreign currency.
However, in the case of Forex, leverage can be applied up to 25 times (for domestic Forex companies).
Benefits and caveats of leverage
Leverage allows you to trade more than the margin, so it has the advantage of good fund efficiency.
For example, if you have a margin of 100,000 yen, you can have a position of 2.5 million yen by applying a maximum of 25 times leverage.
Profit and loss with 1x leverage
1 dollar: buy 1,000 dollars (100,000 yen) at the time of 100 yen
1 dollar rises to 101 yen → profit of 1000 yen
1 dollar: falls to 99 yen → loss of 1000 yen
In this way, the transaction minimizes risk and return.
Profit and loss with 25x leverage
1 dollar: buy 25,000 dollars (2.5 million yen) at the time of 100 yen
1 dollar rises to 101 yen → profit of 25,000 yen
1 dollar falls to 99 yen → loss of 25,000 yen
It is important to note that while leverage increases the potential gains, it also increases the risks by the same amount.
How to calculate margin from the perspective of leverage
For risk control, let's figure out how much margin is required for leverage.
Leverage formula
Trading currency amount ÷ leverage × exchange rate = required margin
For example, assuming that 1 dollar is 100 yen, the margin required to purchase 1,000 dollars (100,000 yen) with 5 times leverage is 1,000 dollars / 5 x 100 = 20,000 yen.
Terms you need to know when starting Forex
One of the reasons why FX trading seems to be difficult is that there are many technical terms, but in reality, the ones that are used frequently are limited.
For those who are just starting FX, if you hold down the five minimum requirements explained here, you will be able to work smoothly.
Spread
What is a spread?
the price difference between buying and sell
It can be said that it is a substantial fee
For example, if a spread of 1 yen is set, the spread will start at a minus of 1 yen immediately after placing a buy order (sell order). can't
Spreads vary depending on the Forex company, so it is a good idea to choose the narrowest possible spread, especially when trading repeatedly in a short period of time.
lot
What is a lot?
Represents the trading volume of a currency in FX
The unit of 1 lot is different for each FX company, such as 1 lot = 1,000 currencies, 1 lot = 10,000 currencies.
It is a term that is frequently used throughout the industry, and depending on the specifications of the trading tool, it may be written in this way instead of the currency amount, so it is a good idea to remember it.
BID-ASK
What is BID-ASK?
BID = selling price
ASK = Buying price
It is often displayed together with the price on charts and order screens. This difference will be the spread explained earlier, so let's remember it together with the spread.
long short
Long = buy order
short = sell order
It is widely used in investment products other than FX such as futures trading and investment trusts, so please refer to it when expanding the genre of investment products in the future.
Important things to prevent failures and avoid risks
It is important to take measures to prevent risk hedging and failures in order to safely manage assets in FX.
Important for risk avoidance
mental control
Observance of the rules
Don't rely too much on other people's information
Thorough loss cut
The common denominator is that it is important to "understand one's own personality and have a mind that governs oneself."
mental control
Mental control is an important point to keep performance constant through F FX trading.
What you want to be especially careful about is that repeated profits will make you want to increase your assets even more, which will lead to more useless trades and bigger losses.
Also, watch out for unintentional increases in positions and trading volumes, as well as dabbling in living expenses and debt to cover losses.
It is important to maintain a calm mentality that allows you to see yourself from a bird's-eye view so that you are not swayed by fluctuations in funds.
Observance of the rules
One of the reasons for reducing funds is making unfounded trades without analysis. In order to protect your funds, you need to make your own rules and trade steadily according to them.
For example, it is effective to prohibit trading two hours before the release of economic indicators, and wait and see if there are no signs or price movements on the chart.
Don't rely too much on other people's information
Market forecasts and trading records are published on Twitter, YouTube, bulletin boards, etc., and there are various ways to collect information.
Of course, gathering information is important. However, there is no guarantee that they can win 100%, and even if they lose a trade, they will basically not be held responsible.
Investing in FX and other areas is something you do at your own risk, and I want you to get into the habit of assessing with your own eyes and thoughts whether the information is valid or not.
Thorough loss cut
One of the mistakes that people who have just started FX are likely to fall into is a reluctance to cut losses. Without overcoming this wall, it will be difficult to manage assets.
In fact, experienced traders tend to cut losses more frequently, and even when the unrealized loss unexpectedly increases, they cut the loss firmly to limit the loss.
Therefore, it can be said that the key to improving performance is to tell yourself to "lose small to win big" when trading.
Decentralization of entries
Consider the current price as the best opportunity and avoid trading at the very limit of your financial strength.
This is because if the position goes backward after the entry, not only will the loss cut line be reached at an early stage, but the loss cut may be postponed and the fund may be lost.
Therefore, it is recommended to adjust the trading volume little by a little while watching the situation when entering.
The flow of starting FX
Let's take a look at the flow of actually starting FX.
account opening
Basically, there is no need to go through the procedures at the bank window, and you can access the official website of each FX company and enter the necessary information.
Examples of common input items
Address, date of birth, etc.
Occupation and place of employment information
Withdrawal account information
Previous investment experience (does not affect screening)
Rough amount of savings at present
Consent to the important matters of the terms of business and various regulations
All you have to do is enter the above items and the process will be completed in about 10 minutes.
Identification
After entering the required information, prepare the following documents and complete your identity verification.
In addition to these, submit you're My Number as either a My Number card, a notification card, or a copy of your resident card (with My Number listed). There is also a pattern to send. For details, please check the application page of each FX company.
If the address, name, etc. on the ID card are different, the document will be disapproved, so it is a good idea to check in advance whether the information matches.
payment
After opening an account, you can start trading by depositing funds into your FX account. There are two main methods, and Internet banking is recommended because it often does not incur fees.
These are only representative examples, so please check the Forex company's guidance for details.
Forex trading method
In Forex, it is possible to switch between various trading methods depending on the market situation, but there are many cases where beginners cannot use them effectively due to the abundance of types and the difficulty of the mechanism.
Therefore, if you refer to the representative trading methods of FX explained here, you will be able to proceed with trading advantageously.
market order
It is the most basic trading method in Forex, and it is possible to establish a trade at the displayed rate.
This is a recommended trading method when you want to trade quickly while watching market trends, so-called "volatility" when prices fluctuate greatly. No price can be specified.
Ability to buy at real-time market rates
Even if the market price changes suddenly at the timing of the order, the order will always go through
It may be closed at an unintended price
limit order
A limit order is a trading method in which a price is specified in advance, and the transaction is completed when that price is reached.
You can buy and sell at a specified price
If the market price does not reach the ordered level, the order will not be executed.
For example, assuming that the dollar-yen exchange rate is 100 yen, you can place an order such as "Buy when it reaches 99 yen" or "Sell when it reaches 101 yen ." It can be utilized actually when seeking a market turnaround.
stop order
It will be easier to understand if stop orders are basically the opposite of limit orders.
Specifically, when the dollar-yen rate is 100 yen, an order is placed such as "sell when it reaches 99 yen" or "buy when it reaches 101 yen". This is an effective method of trading to follow a strong current (trend following).
Orders can be placed at the level determined to fix the loss
There is a possibility that the order will not be executed at the level at which the order was placed.
Application order
In addition to the basic ordering method described above, there are applied ordering methods. By properly using these ordering methods according to the situation, it will be easier to manage risk more efficiently.
1)- IFD
: An order method that puts in a new order and a settlement order at the same time.
2)- OCO
: An order method in which a profit-taking order and a loss-taking order are placed at the same time, and if one is executed, the other is automatically canceled.
3)- IFO
: An order method that places a new limit order and an OCO order at the same time.
4)- Trailing
: An order method that automatically raises the loss cut line
Currencies that can be traded in Forex
The currencies that can be traded in Forex differ depending on the Forex company, but domestic Forex companies also handle many currencies. We recommend starting with the major currency pairs first.
Japanese people are familiar with the dollar/yen (USD/JPY) and the Australian dollar/yen (AUD/JPY), but the most traded and liquid in the world is the euro/dollar (EURUSD) . Therefore, it can be said that this currency pair is easy to trade.
Recommended currency pairs for beginners
Dollar/Yen (USDJPY)
Euro/Dollar (EURUSD)
Currency values fluctuate due to various factors in each country.
Currencies linked to resource prices
Currency fluctuates in value reflecting the country's fundamentals (basic requirements based on economic activity).
In particular, for countries possessing resources, the prices of resources that are exported in large quantities by each country directly affect fluctuations in the currency of that country.
Australian dollar (AUD)
Australia's Australian dollar is one of the representative currencies among the currencies of resource-rich countries.
Australia owns various resources such as iron ore, coal, and bauxite, and when resource prices rise, the Australian dollar tends to rise.
New Zealand dollar (NZD)
The New Zealand dollar (NZD), the currency of New Zealand, is one of the currencies said to be linked to resource prices, just like Australia.
The difference from Australia is that it does not hold resources such as iron ore, coal, and crude oil, but it holds dairy product resources, so it is known as a currency that is linked to the price of dairy products.
The Canadian dollar (CAD)
Canada's currency, the Canadian dollar (CAD), is known as a currency that is easily linked to crude oil. This is because Canada has large reserves of crude oil.
If crude oil prices soar, the Canadian dollar tends to appreciate. Canada also produces natural gas, coal, and uranium, making it one of the currencies more susceptible to the price of all resources than just crude oil.
Since Canada's trade volume is large with the United States, it is closely tied to the American economy, so the Canadian dollar is a factor in price fluctuations in two areas: resources and trends in the United States.
Mexican Peso (MXN)
The Mexican peso (MXN), the currency of Mexico, is known as a resource country currency that is easily linked to crude oil.
Mexico ranks among the top 10 in terms of crude oil production, and crude oil is one of the important resources that support the nation's growth.
In addition, Mexico has abundant reserves of silver, and it is said that there was a time when silver accounted for half of the world's production. It also produces copper, zinc, and gold, making it one of the world's leading resource-producing countries.
Norwegian Krone (NOK)
Norwegian krone (NOK), the currency of Norway, is a currency that is easily linked to crude oil prices.
In addition to oil, Norway produces natural gas, both of which account for more than 10% of GDP and are important national resources accounting for more than 40% of export value.
The Norwegian krone is less liquid than the above currencies, so it can be said that the currency can fluctuate rapidly, so it can be said that it is a point to be careful.
A currency linked to the Chinese economy
The Australian dollar can be cited as a currency that is easily linked to the Chinese economy.
Australian dollar (AUD)
The Australian dollar, which was introduced as a currency that is easily linked to resources, is a currency that is easily linked to the Chinese economy.
The reason for this is that Australia's largest exporter is China, which exports resources to China.
The Australian dollar is also likely to fall as the overall trade volume declines.
Emerging countries and high-interest currencies
Finally, I will explain the characteristics of emerging market currencies such as the Turkish lira and the South African rand.
Turkish Lira (TRY)
The Turkish lira is known as a currency of emerging countries with high-interest rates that are familiar to Japanese people.
Since the policy interest rate is relatively high, it has become a currency with many Japanese investors holding medium- to long-term swap points, but the Turkish lira has been on a long-term downward trend.
In addition, Turkey is a country where political instability and geopolitical risks are likely to occur, so it can be said that it is a currency that should be cautious of sudden fluctuations.
South African Rand (ZAR)
The South African Rand is also one of the currencies that has long been popular with FX traders as a high-interest currency. The South African rand has low liquidity, and like the Turkish lira, it is prone to large fluctuations due to political instability, so caution is required.
It also has the aspect of being a resource country currency with a lot of platinum mining. For this reason, the South African rand has the characteristic of being a high-interest currency that is easily linked to resource prices.
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