Trade Nikkei 225
The Nikkei (Nikkei heikin kabuki) 225 also known as the Japan 225, is the stock market index for the Tokyo Stock Exchange (TSE). The Nikkei was first calculated in the 1950 (retroactive to May 1949) and is the most widely quoted average of Japanese stocks, today it is calculated on a daily basis by the Nihon Keizai Shimbun (Nikkei) newspaper. The prominent nature of the index allows many profitable products to be linked to the Nikkei 225 stocks, which is an indicator of the economic situation and movement in Japan. The Nikkei as the US’s Dow Jones, it is a price weighted index, and consists of 225 large, publicly-owned Japanese companies from an array of industries. This offers investors and traders alike an outlook on investment sentiments towards Japanese equities.
In the late 1980’s, Japan experienced an economic cycle that saw a rapid increase (50%) in the Japanese yen’s appreciation, to counter act a possible recession the government used fiscal and monetary stimuli. Land value as well as stock prices fluctuated during this time and it was recorded that during 1985-1989 these assets tripled in value, and the TSE accounted for 60% of the global stock market capitalisation. In early 1990 the bubble burst and the first in line to be affected was the JPY that fell to one-third of its value that year. Up till October 2008, the Nikkei traded below 7,000 seeing an 80% decline from it’s high in December of 1989. With the assistance of the Bank of Japan and economic injection provide by the government the Nikkei rebound between June 2012 and June 2015, and still below the 50% high of 1989.
The Nikkei 225 is comprised of 225 stocks that are selected from Japans top performing blue-chip companies, based on annual review these constituents can be changed. Once it has been decided that a company will no longer be a part of the index composition, it is deleted from the index and a new one is added following a procedure called ‘Extraordinary Replacement’. Once a year, in September a selection is conducted based on sector balance and company liquidity, the Nikkei has 6 sector categories that are consolidated from the 36 Nikkei industrial classifications.
|Companies||Market capital (USD)|
|Nippon Telegraph & Telephone||91.3B|
Factors that influence the overall index price
Due to its history the Nikkei 225 index has become famous for being the most volatile traded index as it is prone to sharp market moves, plunging, rebounding and recovering. Tying the price of the Nikkei to the USA is mostly due to the Japans exports to the United States. When trading the Nikkei 225 it is always wise to keep your eye on the US Markets, as what influences the USA will most likely have a direct influence on the Nikkei. In addition to that, Nikkei 225 trading needs to run parallel to traders who follow the movements of the US markers as well as their indices. The Nikkei index is extremely sensitive to global events, such as political unrest, war, economical and financial news as well as natural disasters. Economic benchmarks such as unemployment rate, rates increases, GDP figures and job creation are major influences, especially these changes happening in the Japan and United States.
Nikkei 225 Trading Tips
Understanding the workings of the Nikkei 225 means understanding some of the details behind the Japanese economy. Japan operates an export economy, with a majority of those exports headed for the U.S. This means the Japanese economy is tied tightly to the performance of the U.S. economy. It also means Japan’s stock markets are often closely correlated with the moves in the U.S. stock markets, particularly the Dow Industrials.
If you look at previous performance metrics for the Nikkei 225 you’ll see that in a majority of sessions the Nikkei 225 mirrors the overnight performance of the Dow Industrials. Once you know this information you can use it to set up a trading system that takes advantage of the knowledge in trading the Nikkei 225 based on the previous session performance of the Dow Industrials. It’s not a difficult strategy, nor is it complex or confusing. Below are some tips that can help you trade the Nikkei 225 successfully.
When to Trade the Nikkei 225
As mentioned above you can trade the Nikkei 225 anytime based on the previous session performance of the Dow Industrials, but there are some sessions that are better than others when taking this trade. You should pay particular attention to the market on days when the U.S. releases the following data:
- Non-Farm Payrolls report
- US GDP report
- US retail sales
- Consumer sentiment reports
- Manufacturing data
Now of that list the first item, the U.S. Non-Farm Payrolls report has beby far the greatest impact on the Japanese markets. If you look at the market responses on the day the Non-Farm Payrolls is released only (it comes out the first Friday of each month) you’ll be able to see how many sessions showed large moves in either direction in response to that data.
The other reports on the list are also important, because they also impact both U.S. and Japanese market response. Because they report on the health of the U.S. economy, and the U.S. is Japan’s largest trading partner, any strength or weakness in the U.S. is expected to be mirrored in Japan. When the U.S. economy is slowing, or even worse contracting, it severely affects its ability to import products and goods from Japan. Of course this in turn will hurt the Japanese economy. Poor economic reports such as the GDP and retail sales reports can spark a selloff on Wall Street, but they can just as easily spark a selloff in the Nikkei. In some cases, even when U.S. equities don’t selloff those in Japan will anyway as Japanese investors react more sensitively to the U.S. data.
One other thing that should always be considered when looking to trade the Nikkei 225 is the strength of the U.S. dollar versus the Japanese Yen. This is also tied to Japan’s reliance on trade with the U.S. If the U.S. dollar is stronger the Nikkei is more likely to rise and if the Yen is getting stronger the Nikkei is more likely to sink. That’s because a stronger Yen leads to worse revenues for Japanese companies when they repatriate the U.S. dollars they receive when selling to the U.S. However when the USD is stronger the Japanese companies receive more Yen when they repatriate USD, and thus have better revenues and profits.
How to Trade the Nikkei 225
Taking all the above information into account all you need to do is focus on the market open in Japan and trade the Nikkei at that time. Of course not every trade will be a winner, but a majority of them will so long as the historical precedents continue to be effective in predicting how the Nikkei moves in response to the overnight trading session in the U.S. on Wall Street. Most days, regardless of what might be happening domestically in Japan, the first hour of trading for the Nikkei is a response to overnight events in the U.S. and on Wall Street. So this tells you to trade the market open in Japan. Not the mid-day market and not the market close, because those aren’t nearly as predictable. The market open reliably follows overnight results from Wall Street and that’s where you need to focus your trading efforts.
Nikkei Trading information
- The Nikkei trading hours Monday to Friday 23:46 – 06:24 & 07:31 – 17:54 (GMT)
- The Nikkei index moves in increments of 5.00
- The margin requirement 2%
- The minimum trade size is 100
- The Nikkei’s currency is the Japanese Yen
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Nikkei225 Trading Main FAQs
What is the Nikkei 225?
The Nikkei 225 is a price-weighted index of the 225 top blue-chip Japanese equities traded on the Tokyo stock exchange. It can be considered as the Japanese equivalent to the Dow Industrials Index in the U.S. In fact, the Nikkei was previously known as the Nikkei Dow Jones Stock Average. Some of the company’s whose stocks are included in the Nikkei are Sony, Toyota, and Panasonic. The Nikkei 225 is the oldest stock index in Asia.
How can I invest in the Nikkei 225?
If you wanted to invest directly yourself in the Nikkei 225 you would need to buy equal amounts of each stock in the index, which would be prohibitively expensive for nearly every investor. Even though there is no direct way to invest in the Nikkei 225, but there are exchange traded funds that mimic closely the movements in the Nikkei 225. There are several ETFs that track the Nikkei 225 trade on the Tokyo Stock Exchange. They include Blackrock Japan’s iShares Nikkei 225 ETF, and Nomura Asset Management’s Nikkei 225 Exchange Traded Fund.
What is the best strategy for trading the Nikkei 225?
Because Japan is an export oriented economy, and the majority of its exports go to the U.S. there is a strong correlation between the U.S. equity markets and Japan’s Nikkei. In many cases the Nikkei will follow the direction set by Wall Street overnight. In addition, because the Nikkei is so export oriented it can be heavily influenced by the value of the Yen. When the Yen is stronger the Nikkei tends to sink, and when the Yen becomes weaker the Nikkei tends to gain. This is because Japanese exporters benefit from a weaker Yen when they repatriate revenue generated overseas.