Successfull Tips For The Forex Far East

In the U.S., currency trading is still a fringe bet for just a handful of traders. But almost 7,000 miles away, the Japanese are practically pros -- staying up all hours to short the yen against the lira, obsessively following central bankers' moves, and wielding such force they're moving currency prices around the world.

For a nation of 127 million, the power of Japan's currency traders may seem astonishing. Globally, household, or retail, currency trading accounts for less than 10% of the $4 trillion daily forex transactions, but Japanese traders are so active they account for significant moves in currencies they favor. For example, 4% of the daily turnover of the British pound, can be traced to Japanese retail investors, as can 5% of turnover of the Australian dollar, according to a 2009 study by the Reserve Bank of Australia. All told, Japanese investors account for a whopping 30% of spot trading in the yen, according to the Bank for International Settlements.

In the U.S., currency trading is still a fringe bet for just a handful of traders. But almost 7,000 miles away, the Japanese are practically pros -- staying up all hours to short the yen against the lira, obsessively following central bankers' moves, and wielding such force they're moving currency prices around the world.

For a nation of 127 million, the power of Japan's currency traders may seem astonishing. Globally, household, or retail, currency trading accounts for less than 10% of the $4 trillion daily forex transactions, but Japanese traders are so active they account for significant moves in currencies they favor. For example, 4% of the daily turnover of the British pound, can be traced to Japanese retail investors, as can 5% of turnover of the Australian dollar, according to a 2009 study by the Reserve Bank of Australia. All told, Japanese investors account for a whopping 30% of spot trading in the yen, according to the Bank for International Settlements.

To Americans, that sounds nearly impossible. But to those familiar with the Japanese forex scene, it's not surprising. "They are sizable like that," says Javier Paz, a senior analyst with the Aite Group, a financial services consulting firm. And enthusiastic: Despite new restrictions on the amount of leverage traders can use (and therefore, how profitable or risky their trades may be), the number of retail traders rose 15% from 2009 to 2010, according to the Aite Group.

Why are Japanese investors so crazy for currency trading? First, Japanese households are, in the aggregate, flush with cash. The household savings rate has historically been high– up to 15% in the early 1990s, though the rate has dropped to 2% in recent years, according to the IMF. (During the same period, the U.S. household savings rate was never higher than 8%.) At the same time, savers in Japan have also been stuck with extremely low interest rates, Paz says. And with the domestic stock market relatively flat, and an economy that depends heavily on trade, currency trading piqued Japanese interest. "By default, Japanese citizens are much more accustomed to trying to understand and follow what happens in other parts of the world," Paz says.

Of course, enthusiasm doesn't necessarily beget success. Japanese brokerages there aren't required to report investor performance like American ones are, so there's no way to know if they're actually making money. But one thing is certain: Americans aren't. Roughly 65% of currency trading accounts in the U.S. lose money , according to a recent SmartMoney.com investigation. For that reason alone, it couldn't hurt to see what Japanese retail traders have learned from years of experience:

Consider the carry trade (but be careful). Low yields in Japan have made the "carry trade," in which investors borrow one currency at a low interest rate to buy a higher-yielding currency, a popular move, says Dean Popplewell, the chief currency analyst at Oanda, a retail foreign exchange dealer. The most direct way to do this is to take out an actual loan in a country with low interest rates, like Japan, then open a savings account in a country where interest rates are higher, like Australia, so you'd earn more in interest abroad than you were paying at home. Forex dealers simplify this process (for a fee, of course), allowing investors to earn the Australian dollar's interest rate just by buying it against the yen (the dealer takes the other side of this trade). "In the currency world, a carry trade using very low leverage is a conservative investment compared to other kinds of trading," says John Jagerson, the founder of Learning Markets, LLC, and co-author of the book "Profiting With Forex." When exchange rates stay relatively stable, this kind of trade can be very profitable, as it was for many Japanese investors between 2003 and 2007.

But these carry trades still carry plenty of risk. An investor using 50-to-1 leverage would be wiped out by a 2% drop in the price of a currency he had bought, Jagerson says. At 5-to-1 leverage, it would take a 20% change in the exchange rate to wipe out a position. Moves that size are rare, but difficult to predict, Jagerson says. The Australian dollar's sharp fall against the yen in 2008 caused huge losses for Japanese retail investors, according to the Reserve Bank of Australia.

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