What is currency?
To explain why currency trading in Japan is such a big deal, we must first understand. Currency can be defined as money used by a government or country to buy and sell goods and services within its borders or internationally.
Think about how you use your currency when traveling abroad: To pay for food at restaurants, lodging at hotels, souvenirs, etc. We use currency all the time, but it is a method of exchanging goods and services at its core. This very same principle behind this daily usage is how currency trading in Japan works.
What drives these fluctuations in currency valuation?
Three main factors drive the value of a country’s currency: economic growth potential, political conditions, interest rates, and demand and supply. If we simplify this, currencies inflate and deflate as their respective economies grow or shrink.
When business is thriving in a particular country, the demand for workers will increase, so wages go up, prices will rise because now there’s more money around to buy stuff which means inflation occurs (the opposite happens during a recession). As the currency rate goes up, foreign countries will want to trade to sell their goods at a higher price.
Today many traders are moving into the forex markets looking to take part in this billion-dollar industry, which some economists predict will grow even more significantly in the future. But with this increase in popularity, there is also an increase in scams trying to take advantage of these newbies who have no clue how the forex markets are supposed to work.
The first thing you have to set yourself up for is a loss. There’s no way around it if you want to see any profit in your trading career. You have to be willing to accept this; otherwise, you will fall victim to the same mistakes repeatedly because of your unwillingness to let go of what you think may have been a better outcome had things gone differently.
Trading currencies can be very profitable, but there are also many pitfalls that inexperienced traders often fall into, which end up with them losing all their money rather quickly.
Here are some essential points that everyone who is trading currencies should know before they begin:
Leverage is not your friend.
If picking up a pack of gum suddenly cost you $1000, you would probably think twice before buying it. It’s how most people approach the idea of trading currencies, but in this example, we’re talking about dollars, not currency.
When you trade with dollars, no actual money is being moved, only numbers on a computer screen representing these real-life transactions. If leverage is used when trading, this means you are trading multiple amounts of your original investment without having to put up all this money upfront (in some cases even 100x more).
Not only does this amplify wins, but it also amplifies losses which can be devastating for new traders who aren’t prepared for their first loss when they suddenly lose the majority of what they invested within a matter of minutes or hours instead of days or weeks.
Manage your risk
It means that you have to manage how much money you are willing to lose at any given time because losing all your assets is not an option. It’s straightforward to think about how much you could make if everything went well, but the forex market is almost entirely based on chance and luck, meaning things can turn around quickly.
You are not going to become a millionaire overnight. Even the best traders in the world only average 1-2% daily, and that’s after years of experience and study into trading patterns, macro / micro-economic trends, etc.
Becoming good at forex takes time, but as long as you remember those three key points above (the fact that leverage can hurt you if misused, managing your risk, and being patient ), your chances of making mistakes will be significantly minimized as you continue on your journey towards perfect self-knowledge as an investor.
Are you interested in trading in Japan? Check out Saxo for more info.