Episode 1: What is FX? Learn the basics of currency pairs

Forex as a Financial Instrument

Foreign exchange margin trading (FX) is a financial instrument that allows you to profit from changes in the value of money (currencies) of different countries by buying and selling them. For example, you might think of it as exchanging Japanese yen for American dollars. It is a trading method that aims to profit from currency value fluctuations.

Why is FX Popular?

FX is popular for the following characteristics.

• Can start with a small amount of money (some brokers allow trading from 1,000 currency units)
• With leverage, you can make large trades with a small amount of money (the principle of leverage)
• If you have Internet access, you can trade anytime, anywhere (a smartphone is sufficient)
• 24-hour trading is possible, so you can trade after work (trading during work is not recommended)

FX Risks and Returns

FX has both risks and returns. Return refers to the profit you make from investments. On the other hand, risk is the possibility of losing the invested money. In FX, if the value moves in a direction you did not anticipate, the risk increases. Therefore, risk management is very important. Also, higher-return trades tend to carry higher risk, so it is important to choose a trading method that suits you.

Basics of Currency Pairs

Concept of Currency Pairs

A currency pair is a combination of two countries’ currencies that are bought and sold simultaneously in FX trading. For example, the pair Japanese yen and American dollars is written as “USD/JPY.” In this case, USD represents the U.S. dollar and JPY represents the Japanese yen.

Major and Minor Currency Pairs

Currency pairs are categorized intomajor currency pairsandminor currency pairs. Major currency pairs are combinations of currencies with high trading volume and stability. For example, the pair of the U.S. dollar and the euro (EUR/USD) is well known. Minor currency pairs are currency combinations with lower trading volume and often less stability. For example, the pair of the Turkish lira and the Japanese yen (TRY/JPY) exists.

Understanding Price Movements of Currency Pairs

In the foreign exchange market, the price movements ofcurrency pairsare constantly occurring.Currency pairis a representation of one country’s currency in terms of another country’s currency. For example, USD/JPY shows how many yen one U.S. dollar is worth. When exchange rates fluctuate, the price of the currency pair also changes. By using these fluctuations, you can earn profits.

Characteristics and Risks by Currency Pair

Each currency pair has its own characteristics and risks. For example, major currency pairs are stable and have low risk, but opportunities for profit are often smaller. On the other hand, minor currency pairs tend to have larger price movements, so opportunities for profit are bigger, but risks are higher. It is important to choose currency pairs that suit your risk tolerance and trading style.

Basics of Trading

Long Positions and Short Positions

In FX trading, you can buy and sell money using two methods:Long positions(buy positions) andShort positions(sell positions).

Leverage and Margin

Leverageis a mechanism that allows you to make large trades with a small amount of money. For example, using 25x leverage lets you trade 250,000 yen with 10,000 yen. However, using leverage also increases losses, so caution is required.Marginis the minimum amount of money required to trade with leverage.

Spreads and Fees

Spreadis the difference between the bid price and the ask price. This difference becomes the broker’s profit. A narrower spread lowers trading costs and increases the potential for profit.Feesare the money you pay for each trade. Some FX brokers offer fee-free trading.

Fundamental Order Methods (Market Orders, Limit Orders, Stop Orders)

FX trading offers several order methods.Market orders execute trades immediately at the current market price.Limit orders (pending orders) are orders to execute trades at a pre-determined price. Stop orders are orders to take the opposite position at a pre-set price to limit losses. Using these order methods wisely can improve trading efficiency.