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Today, the foreign-exchange (forex) market is the largest financial market in the world, with more than 200 trillion yen in market trading volume per day.
In 1998, Japan’s Foreign Exchange and Foreign Trade Control Law was amended to enable ordinary investors in Japan too to take part in forex trading. Over just a few years since then, the forex market in Japan has grown to nearly surpass 80 billion yen in size.
Long ago, forex trading was a typical example of what people considered questionable financial transactions.
In fact, there were frequent cases of problems as the market was crowded with shady brokers during periods under uncertain legal and regulatory systems.
However, today forex trading is the financial instrument attracting the most attention as one in which not just ordinary investors but even homemakers and students may trade easily and at any time, as the legal system has been improved and dishonest brokers have been weeded out of the market, and with the spread of online trading.
This site introduces overseas investors to forex brokers in Japan and provides eight tips to enable beginning forex investors to succeed, including techniques for forex trading in Japan.
Eight tips for forex trading in Japan
“M” is a financial planner who operates Japan’s largest forex e-mail newsletter and Web discussion board.
M’s remarks are said to be a bible to investors.
In addition, M is well-versed on and active in a wide range of investments, including not just forex but also investments in Japanese and foreign equity markets, government-bond futures, and commodity futures.
These eight tips from M for successful forex trading, available exclusively on this site, cover information such as common pitfalls for beginning investors and the realities of forex brokers.
- Tip 1: The realities of forex brokers
The truth about no-fee forex brokers
I believe there are two types of forex brokers: those with high fees and those with low fees. In many cases, it is the clients of brokers with high fees who get the most returns on their investments.
Actually, lowering fees increases the profit a forex broker earns.
This is because setting fees to zero leads to an increase in the number of trades clients make.
A forex broker earns more if its clients make more trades.
As an example, this is just like how McDonald’s sales increase if it cuts the price of a hamburger by one-half.
The result is something like a low-margin, high-turnover approach.
To the user, it seems like reducing fees to zero would reduce the cost of trading. However, in fact that is not the case.
In many cases, elimination of fees leads to an increase in the number of trades, resulting in losses.
In today’s market, the more trades an investor makes the less likely he or she is to profit.
Why is this the case?
It is because investors tend to take irresponsible positions if they are not charged any fees.
In choosing a forex broker, the most important factor may be the dependability of its trust security system.
The falsehood behind trust security systems
A trust security system refers to keeping the money entrusted to a forex broker by its clients separate from the broker’s own funds.
However, in actuality there are many brokers that do not separate clients’ funds from their own.
Numerous brokers think of the funds entrusted by their clients as their own money.
First of all, the most important thing is to ensure that money entrusted to the broker is separated from its own funds.
Clients’ assets need fully to be stored separately from the broker’s assets, in accounts at trust banks.
While a broker that claims to offer a trust security system is required to handle clients’ funds thoroughly as described above, this does not mean that in actuality all funds entrusted with the broker are deposited in a trust bank.
If even 10% of funds entrusted by clients is covered by the trust security system, the broker may claim to provide a trust security system.
Most important is whether the firm is an honest one.
An honest broker manages its clients’ funds separately from its own, so that even if it was not placed in a trust security system the client can be sure his or her money can be returned.
Charts differ by broker!
Actually, charts can vary slightly between different forex brokers.
A close look at another broker’s charts might show lines that are a bit longer.
For example, some forex brokers may make the stop-loss system more likely to take effect by manipulating charts.
It’s a good idea to use more than one forex broker
When a beginning investor opens his or her first account, it is best to do so not just with one broker but with three or so.
This is because, for example, it is common that a forex broker’s chart might not move.
You might be able to spot such a case by looking at another forex broker’s chart.
You also can trade with one broker while looking at the chart of another.
For example, if you have a long position with one broker but want to take a short position in response to a rapid drop in exchange rates, and are unable to do so because the broker’s system does not move quickly enough, you can take a short position with another broker.
I think in most cases it is a good idea to open accounts with three or so forex brokers.
The broker needs to provide careful customer service!
When making trades, in cases such as when things do not go as planned or you are not sure how to conduct a special type of transaction, the only way to figure out the problem may be with a telephone call.
The broker should provide careful instructions such as which button to press when you make a call.
In the end, starting with a forex broker who provides attentive and detailed instructions is recommended.
Once you get used to the markets you will understand how they work, and then you can trade with other forex brokers as well.
Beginners do not understand leverage
Many beginners conduct transactions without understanding the volume at which they are buying and trading.
I once heard a beginning investor claim that he was making a killing by trading at a 100:1 margin on his one million yen in funds, but he was just experiencing positive returns by chance. His returns could turn negative before he knew it.
Cutting losses is the greatest benefit of forex trading
While some investors do not cut their losses, doing so definitely is recommendedA stop-loss system is the greatest benefit of forex trading.
In the case of other investments such as equities, when the price of a stock such as Livedoor collapses, even if an investor wants to liquidate his or her holdings sometimes he or she may be unable to do so for 14 days or so.
Transactions such as credit transactions may all result in losses.
Forex trading is highly recommended because investors can cut their losses whenever they want.
Never set definite goals for returns
While investors often try to set goals based on success theory, trying to meet fixed goals, such as earning a certain amount per month or trying as hard as one can to increase earnings in a month in which they seem low, can lead one to grow more enthusiastic about trading without even noticing it, possibly leading to increased leverage and to holding an unsustainable position.
An investor must not get too enthusiastic.
Setting definite goals for returns can lead to failure in the market.
Sometimes it is good to take a step back from the market
In some cases, when an investment is not generating returns, it is simply because the price itself is not sustainable.
The opposite is true as well: sometimes an investment generates returns without the investor doing anything.
Sometimes it is good to take a step back from the market.
If an investor is doing poorly in the market, it may be a result of the decisions the investor has made, or it could be because the market itself is performing poorly.
In either of these cases, it is a good idea to step back from the market.
It is important to take a break and cool one’s head.
How much funds does a businessperson need to start forex trading?
Although there is no clear and definite amount required, if you want to invest in a single transaction in an amount of 1 million yen you would use leverage of about 10:1 if you started with about 100,000 yen.
Even with a hedge fund, leverage is about 2:1 or 3:1.
A professional dealer at a bank conducts transactions with leverage of 1:1.
At leverage of 10:1, risk is 10 times the amount invested. At this rate, funds could disappear quickly.
This is because even professionals do not always make money on their investments.
Controlling leverage is very important.
Reasons why professionals might not make money on forex investments
Professional dealers do not make money on investments because they buy and sell only over the short term.
Also, professionals can never step back from the market and take a break.
Since they need to conduct transactions at all times, they tend to not have positions in the market when it is good to do so and to have positions when they should not.
They need to have positions in the market even on days when they definitely are unable to understand the market.
As an example, let’s say that the market is attractive only for about two months during the year.
If a professional decided to trade only during those two months and take a break the rest of the year, he or she would quickly be out of a job.
In contrast, nonprofessionals step back from the market when they don’t want to trade.
This is why nonprofessionals are likely to outperform the professionals.
When should you step back from the market?
- Take a break when the charts do not move the way you thought they would
- Take a break when you have suffered continuous losses
- Basically, take a break when you do not want to enter the market
In the end, there are times when the market moves in straightforward ways and times when is difficult to understand what the market is doing. Trading in the latter case can have serious consequences.
In many cases, the forex market is fairly easy to read, and you can guess what the consequences will be for any action. However, it is important to step back from the market when it does not move as expected.
Recommended currency pairs
The Australian dollar is recommended, because it tends to move in the most straightforward way.
While people often think that a currency that shows major movements has better returns, in reality a currency that moves in a straightforward manner is the most profitable.
When the market is slow it shows little movement, and when the market is rising it rises.
Charts for the Australian dollar seem to move in a straightforward manner as forecast.
The New Zealand dollar, on the other hand, can undergo sudden and surprising moves.
Since the market for the New Zealand dollar is small, a slight disturbance can result in considerable movement.
Technical indicators are not helpful
I almost never use technical indicators, and I basically avoid using the chart analysis method as well.
There is a limit to the usefulness of charts because they use past data to analyze the future.
If they were always right, then everybody would get rich in the market.
While in fact chart analysis probably is important to some degree, it also often can be deceiving.
I think an investor can start trading after he or she learns to analyze sentiment, fundamentals, and charts together.
I don't think it is a good idea for an investor to use only charts, only fundamentals, or only sentiment.
It is better to combine all three of these together.
Forex trading in times of war, earthquakes, terrorism, or similar incidents is a form of risk management
When war breaks out in the Middle East, the dollar first falls and then rises in value.
In the event of a major earthquake in Japan, such as the Great Kanto Earthquake of 1923, the value of the yen will decrease.
As another means of risk management, it is important to have multiple means of communication such as cable modems and fiber-optic lines as well as personal computers, so that you still will be able to conduct transactions in the event of a disaster.
Also, you should have generators available.
In addition, while forex brokers probably have plans and systems in place for responding to a disaster, this may be difficult at some brokers, such as smaller ones.
Reasons for forex investment
While in the past it would not have been a good idea for amateurs to get involved in forex trading, today forex trading is recommended to amateur investors because it has become easier to understand.
Ordinarily, the key to investing is choosing investments that will make money for the investor.
If equities have good returns, investors should choose the stock markets.
If foreign exchange has good returns, they should choose forex markets.
If real estate has good returns, they should choose to invest in real estate.
The investments that are in season undergo constant change.
What will happen to forex markets in the future?
How should investors respond to markets undergoing severe price fluctuations?
Today, a rising market that would have lasted one or two years in the past may last only about two weeks.
I think in some ways a market can be considered attractive if it does not tumble.
By reducing leverage and buying when the yen is rising, what in the past had taken one year now can now be done in one week.
Another method is to change the subject of investment
If in the end Japan were to become fiscally insolvent or to suffer a similar fate, such as severe inflation even though not technically insolvent, continued fiscal deficits would lead to a breakdown at some point.
Until now the day of reckoning has been postponed, but the longer it is postponed the greater the fall.
If such an outcome were to come to the surface, resulting in disorder in the markets, the yen would bottom out.
I think the Australian dollar could rise to about 200 yen.
At that point investors should sell.
At the moment they sell, investors should buy investments such as equities or real estate that have become more attractive.
I think this is the best performing type of investment.
While investors buying and selling over the short term also can take part in forex transactions, it would be a good idea to buy leading international equities that had bottomed out, such as stock in Canon or Toyota.
Since the times will change, it is a good idea to invest only in the most attractive markets.
Is selling in forex markets a bad idea?
Basically, I do not conduct selling.
Ordinarily, one would think that selling and buying together would be doubly attractive. However, in fact that is not the case.
When buying, if investors do not focus on buying they cannot do it well.
It is difficult to switch one’s way of thinking between buying and selling modes.
Since selling cannot be conducted without paying for a swap, it is not particularly useful.
However, one might want to think of selling in cases such as when the market falls dramatically.
In the future, there might be an even greater drop in August.
In future forex trading, leverage of 1:1 to 2.5:1 will be enough
In the past, it was said that leverage should not exceed 5:1. However, today 2.5:1 should be considered the maximum.
Since future price fluctuations are likely to be even greater, leverage of 1:1 may even be a good idea.
While high prices are being pushed up, isn’t it likely that the bottom would drop lower as well?
Investors should use lower levels of leverage when price fluctuations are more severe.
How to take part in forex trading with good timing, by buying at the bottom
One method of investing is to concentrate solely on buying at the bottom.
Under this method, one ordinarily adopts a wait-and-see attitude without trading and then buys at the bottom when the market seems desperate or falling markets make the front page of the news.
I think properly speaking this is the most attractive method of buying.
While I think many amateur investors are making money using this method, in recent forex markets it has come to be thought that foreign exchange is suited to short-term buying and selling. For this reason, the number of investors adopting this method has decreased.
While the same is true for equities, I don’t think equity markets have reached the bottom of their second dip yet.
I think stocks could easily fall below 8000 yen.
I believe they will fall to about one-half their current level.
But I don’t think this will happen right away.
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