Let's Start Forex Trading! A Complete Guide for Beginners
In Japan Today, with prolonged low interest rates, low infrastructure, and the so-called “100-year lifespan,” there is a growing need to start thinking about asset formation as early as possible. In fact, it is said that more and more high schools are introducing classes on asset management methods, including investment.
Among the many types of investment, forex trading is gaining popularity among young people. Recently, investment activities can be done more efficiently by using platforms such as MT4 .
Here, we will introduce how FX works and how to get started so that even beginners who are just starting out in FX can understand it easily.
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First of all, what is FX?
FX stands for “Foreign Exchange” and is called “foreign exchange margin trading” in Japanese.
So what exactly is foreign exchange (FX) margin trading? As its Japanese name suggests, FX is a portmanteau of “foreign exchange trading” and “margin trading.”
First of all, foreign exchange trading refers to the exchange of two different currencies.
For example, a transaction where you sell Japanese Yen and buy US Dollars is called “buying US Dollars/yen,” and a transaction where you sell US Dollars and buy Japanese Yen is called “selling US Dollars/yen.” When you travel abroad, you may have had the experience of exchanging Japanese Yen for your destination currency, which is also a type of foreign exchange transaction.
Margin trading refers to depositing a certain amount of margin and executing transactions using that margin as collateral. By depositing margin, you receive credit from the trading firm, which allows you to trade many times the amount of the deposited margin.
In other words, FX means “making foreign exchange transactions using the margin deposited as collateral.” In forex trading, the currencies of two countries are always traded as one unit. For example, as mentioned above, there are “US dollar and Japanese yen” and “Euro and Japanese yen.” In Forex trading, the combination of these two currencies is called a “currency pair.”
Advantages of FX
There are two types of profits you can make from forex trading. One is “exchange rate gains.” This is sometimes called “capital gains” – in other words, if you buy when the exchange rate is low and sell when the exchange rate is high, you will make the difference, right? This difference is what you make as profit.
Another is “swap income”. This is also sometimes called “income gain”. Swap income is like interest and is earned by selling the currency of a country with a low interest rate and buying the currency of a country with a high interest rate.
For example, let’s say there is a currency pair between two countries, Country A (interest rate 10%) and Country B (interest rate 1%). In this case, simply selling the currency of country B, which has a low interest rate, and buying the currency of country A will profit from the interest rate differential between the two countries (9% in this case). It doesn’t matter if the exchange rate goes up or down. By simply holding the currency with the high interest rate, you can generate daily swap income.
However, please note that if you sell the currency of a country with a high interest rate and buy the currency of a country with a low interest rate, you will have to pay swap points every day.
FX's Biggest Attraction: Leverage
In FX, a mechanism called “leverage” allows you to trade large amounts with a small amount of money. It is no exaggeration to say that leverage is the biggest attraction of FX.
Let me explain in detail how it works. For example, if you want to buy 1,000 dollars when 1 dollar = 100 yen, you actually need 100,000 yen. However, if you use 25x leverage in forex trading, you can trade with 1/25 of that amount. In other words, you will be able to buy 25,000 dollars with 100,000 yen, and the profit you will get when the exchange rate or swap points increase will be even greater. Simply put, you can see that this is a much more capital-efficient investment method compared to foreign currency deposits, which have no leverage effect and high costs. In addition, while domestic foreign exchange companies limit leverage to 25x, some foreign exchange companies offer even higher leverage.
Thus, the leverage effect in FX allows you to aim for big profits with little capital, but on the other hand, there are risks involved, and if you make the wrong decision, you may lose your deposited funds or suffer a large loss due to stop loss. Stop loss is a mechanism that automatically forces a position to be liquidated when the unrealized loss, which is the loss that has not been determined (before settlement), reaches a certain level. Unlike stop loss, “stop loss” means that you determine your own position, not being forced to determine it by the forex company. In any case, you can take action by not over-leveraging your investment funds and not holding large positions. In other words, when investing in foreign exchange, risk control in terms of how many times the effective leverage will be very important.
Flow from Account Opening to Trading
Now, let's explain how to get started with FX, specifically explaining the process from opening an account to starting trading.
Choosing a foreign exchange company
Each forex company has its own characteristics, and spreads, swap points, fees, etc. vary depending on the company. You also need to carefully compare whether a domestic forex company is better or an overseas forex company.
Therefore, when choosing from the many options available, it is best to focus on which company best suits your trading style. For example, if you often make transactions aimed at gaining short-term exchange rate profits (scalping or day trading), it is better to choose a company with narrow spreads (low costs). On the other hand, if you are interested in medium to long-term transactions (swing trading) or profiting from swap points, you can expect to increase your profits by choosing a company with high swaps for the currency pairs you trade.
Having a clear understanding of your trading style will help you make clearer choices.
Open an account
Although it varies depending on the forex company, as online trading has become more common in recent times, account opening applications via computer or smartphones It's getting easier. To apply, enter the required information such as your name and address in the online application form, then upload or send your identity documents to complete the application. Nowadays, there are almost no more complicated procedures, such as having to go to a branch and fill out an application form, so you can easily open an account whenever you want.
Deposit funds
As with the process application, more and more companies now allow deposits via online banking, but generally you will transfer money to an account designated by the FX company.
Start trading
Once your funds are deposited, you can start trading at any time. Depending on the forex company, you may need to set up trading tools such as a special application, so make sure to set up your trading environment before you start trading.
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