The Japanese Yen can be a lucrative market to trade. Each tick is valued at $12.50, resulting in a move from 72.00 to 73.00 equaling a profit or loss of $1,250.00.
The market is heavily traded at the IMM Division of Chicago Mercantile Exchange. Open interest is large, and daily volume is high. Thus ranking the Yen Contract #2 behind the Deutsche Mark.
The market has a history of excellent long term trends, making it a very good market to trade, except for one major pitfall! Unfortunately, an all too common occurrence is GAP OPENINGS. Sometimes, depending on overnight fundamental news, or technical events, the market may open dramatically lower or higher. For example, the market may close at 72.50 but open at 71.30 the next trading day on the floor of the CME in Chicago. If you were long you would have a large loss of $1,500.00. That would occur even if your stop-loss was much smaller than this because stop-losses offer no protection on gap- openings.
Still another problem with the Yen is on occasion the market has a powerful move, much greater than normal. For example, there was a day your editor recalls with a move of over 450 points, representing potential loss or gain in excess of $5,600.00, based on just one contract during one trading period!
Another possibility is placing overnight stops in the EFP market in order to prevent the gaps from going against you. These are very useful tools in helping to trade all of the currencies.
The best way to protect against the occurrence of a significant intra-day loss is to use comparatively small stop-loss orders during the trading day and ALWAYS have them placed (no mental stops). The best way to guard against huge gap openings is to not trade on days potential fundamental news is expected, such as Group of Seven Meetings, etc. You can hear about possible important fundamental events by checking with your broker or advisor, or reading the financial news closely, such as The Wall Street Journal.
Still another way is to only trade the Yen providing you have double margin available in your account as a cushion. In other words, if your broker requires $2,500.00, only trade it if you have $5,000.00 available margin.
The "best" way to trade the Japanese Yen profitably is using a conservative trading methodology. However, if doing position trades (vs. day trading) you will have to contend with the possibility of large over-night losses and realize an inter-day stop-loss order will not protect you from over-night gap-openings against you.
You should check with your broker about his recommendations for protection when the primary CME market is closed. It's possible to obtain loss protection via the Chicago Mercantile Exchange Globex Market or the foreign Cash Currency Markets. However, the cash currency markets are mostly intended for large traders and will also normally entail higher commission costs.
Don't use so called mental-stops but actually place a stop order with your futures broker. Inter-day stops should always be in place and be large enough to avoid getting stopped-out needlessly (usually 99 points or less) but still reasonable to avoid huge intra-day losses.