What is FX Trading? A Complete Guide to Risks and Returns

What is FX Trading? A Complete Guide to Risks and Returns

“What is FX trading? Since it’s an investment, does it always come with risks? …”

FX is an investment where you can gain significant returns if things go well, but at the same time, there is a risk of losses. In this article, we will clearly explain the basics of FX, as well as the balance between risks and returns.

1. What is FX Trading?

FX stands for “Foreign Exchange,” translated in Japanese as “foreign exchange margin trading.” It is a system where you buy and sell different countries’ currencies (e.g., USD and JPY) to make a profit from price differences.

For example, if you buy USD when 1 USD = 150 JPY and later sell it when 1 USD = 152 JPY, you gain 2 JPY per dollar. This is the basic idea of FX trading — profiting from exchange rate fluctuations.

In FX trading, you can start from either “buy (long)” or “sell (short),” which means you can aim for profits in both rising and falling markets.

2. How FX Returns Work

One of the main attractions of FX is that you can aim for large returns with a relatively small amount of capital. This is possible thanks to a system called “leverage.”

For example, with 10x leverage, investing ¥100,000 allows you to trade ¥1,000,000. If you buy $1,000 at 100 JPY and sell at 101 JPY, you make ¥1,000 profit. Even with ¥100,000 capital, that’s a 1% return (minus fees and spreads).

Additionally, depending on the currency pair, you may earn “swap points,” which are interest rate differentials. Specifically, by selling a low-interest currency and buying a high-interest one, you can earn daily interest, contributing to long-term returns.

3. Main Risks of FX Trading

While FX offers attractive returns, there are also several risks you need to be aware of.

(1) Exchange Rate Risk

The most basic risk is the possibility of losses due to currency price fluctuations. For example, if you buy USD at 150 JPY and the rate falls to 148 JPY, you incur a loss. Markets are influenced by politics, economics, and geopolitics, so fluctuations are constant.

(2) Leverage Risk

While leverage magnifies potential profits, it also increases potential losses. For example, at 25x leverage, just a 4% adverse move in the market can wipe out your entire principal.

(3) Stop-Out (Margin Call) Risk

If your margin falls below a required level, your positions may be forcibly closed — this is called a “stop-out” or margin call. It locks in losses, so careful margin management is essential.

(4) Spread (Transaction Costs)

In FX, there is always a “spread,” the difference between the buy and sell price. This is effectively a transaction cost, and if you trade frequently, it can add up to a significant expense.

For more details on the risks of FX trading, see our other article.

4. Three Key Points to Reduce Risk

If you understand and manage risks properly, even beginners can trade FX with confidence. Here are three important points to remember:

(1) Set Low Leverage

Beginners should avoid high leverage and start with modest levels, such as 2x–5x. This way, even if the market moves against you, losses can be minimized.

(2) Establish Stop-Loss Rules

By deciding in advance a level at which you will cut your losses, you can trade calmly without being swayed by emotions. Stop-loss is an essential strategy to keep losses small.

(3) Limit Capital per Trade

Capital management is also crucial. Instead of putting all your funds into one trade, diversify with margin so that risks are easier to control.

5. Who is FX Trading Suitable For?

FX trading suits people who are attentive to market movements, interested in daily economic news and global events, and capable of staying calm and making rational decisions. Such individuals have a higher chance of success.

On the other hand, those who “want to get rich quick,” “cannot cut losses,” or “trade on gut feeling without considering risk” may struggle in FX. Understanding your own tendencies is key.

Conclusion: Profits in FX Come from Managing Risk

FX trading can be attractive if you understand its system and practice strict risk management. Features like 24-hour trading and the ability to start from selling are advantages not found in many other financial products.

However, never forget the rule: “High returns = high risks.” Start small, use demo trading to gain experience, and gradually develop a style that suits you.

Trade patiently, avoid greed, and build the skills needed for long-term FX success.