The Japanese market for CFDs is the biggest in the world. In 2016, about 8 trillion yen worth of contracts were traded, more than 40 per cent of the total market worldwide.
Trading CFDs has become very popular; nearly 4 million accounts have been opened, and almost 5 million trades are made each day.
However, there’s a lot to learn before you start trading. Since it’s necessary to understand what you’re doing, we decided to introduce it here to help you choose the best strategy according to your needs.
Types of Contracts
The two most common CFD contracts traded on Japanese exchanges are index and stock options (called “Certificate” in Japan).
They allow traders to go long or short on the market.
The second type is called Certificate because, as mentioned above, it’s a traditional stock option whose premium depends on the underlying asset’s price.
In Japan, most stocks are traded using this model, which consists of buying or selling a specific amount of shares at an agreed-upon price in the future (expiration date).
This type does not require margin and can result in limited losses for traders who know how to manage their risk-reward ratio.
Generally speaking, Certificate options trade within certain hours during the trading day when there is enough liquidity to realize fair prices for buyers and sellers.
Japanese markets generally close at 6:00 pm JST, but CFDs are priced continuously throughout each session to be traded 24 hours a day. The last session opens at 9:30 am JST and closes at 3:00 pm JST.
This type of contract is hazardous for inexperienced traders; the purchase price reflects real-time fluctuations (up or down) in the market, leading to quick profits or sizable losses depending on market conditions.
It is why it’s necessary to get advice from an experienced broker who will determine whether you’re ready to trade this option based on your level of experience and risk tolerance.
The performance of Certificate contracts depends on the underlying stock index or individual stocks. It means that if you make money, you and everyone else who trades it – including companies, governments and large investors.
In this area, liquidity is critical: you want to ensure that prices remain relatively stable throughout the trading session.
If there aren’t enough buyers and sellers at a given time, the price can quickly “jump” by several points, which can significantly affect your returns.
Another type of contract is popular with experienced traders familiar with traditional markets. It’s called the Mini-Certificate and was launched in 2014.
This option generally has a lower level of volatility than derivatives because its premium consists mainly of intrinsic value. I.e., it’s not based on fluctuations in the underlying asset’s price as it would be for Index or Stock options contracts.
In this case, investors have more control over their risk-reward ratio because they only pay a premium if the contract is currently trading “in-the-money”.
You can use this type of option to open short and long positions and benefit from increased volume and liquidity over time.
CFD Trading Strategies
When we talk about CFD trading, we need to determine whether you want to go long or short – this will determine your strategy and your account’s limits.
As a general rule, you should choose between two options: “cash” or “margin”.
There is no leverage with cash accounts, which means that profits are limited without sufficient capital invested into the trade.
Conversely, margin accounts allow traders to magnify their returns by using borrowed money (or other assets) as collateral for buying more than they could with a cash account.
These accounts require margin trading and can be subject to intraday and overnight fees if the balance falls below a certain level that your broker determines.
The first point to remember about CFD trading strategies in Japan is that you should always verify current market conditions before making any investment.
It means checking the currency exchange rate, the prices of other assets (such as stock indexes), and reviewing critical economic data such as GDP growth rates, inflation or interest rates, among others.
You should also research global markets, pay attention to geopolitical risks, and affect currency pairs (e.g., Brexit, Trump’s election).
Choosing a time frame for your trade will depend on which underlying asset you decide to trade.
For more information link to Saxo Bank CFD.