Due to its fascinating liquidity and low bid-ask spreads, trading with USD/JPY became so popular for both beginners and experienced traders. Imagine yourself trading with these currencies from a well-developed nation in the world. This page will help you understand the history of the currency pair, the reasons why trade with USD/JPY, and the drawbacks.
What Is USD/JPY?
USD/JPY in layman’s term is the exchange rate between the US Dollar and Japanese Yen. The figure shows how many Japanese Yen is needed to buy one US Dollar. In this currency pair, the base currency is the US Dollar.
The currency pair’s rich volatility and volume once had a daily turnover above $900 billion. USD/JPY currency pair is next to the EUR/USD currency pair as the most traded currency in the world. The pair is responsible for a daily forex turnover of roughly 17.7%.
Why Trade USD/JPY Daily?
Here are some reasons why trading with USD/JPY daily in real-time is so appealing. The following are the characteristics that made this currency pair an enticing prospect for the traders.
- Relative low spreads – the currency pair remains and will remain popular due to its low bid and offer spreads.
- Volatility – The currency pair is often affected by the forces in the Asian market; as a result, it displays high levels of volatility. As a result of its volatility, profits for daily traders are possible.
- Volume – Trading tips and forex signals are easy to find for this currency pair because these currencies are two of the most active currencies in the world, and the market volume is huge.
- Predictability – Predicting the market of this currency pair is relatively straightforward; it is often linked to trading commodities in Japan. Gauging the market sentiment is recommended by studying global imports and exports.
- Trading Vehicles – Being one of the most popular currency pairs, there are a large number of trading vehicles a trader can use to gain profits. E-mini and E-micro USD/JPY, ETFs, and more.
- Beginner Friendly – This currency pair has a smooth trend, and brilliant liquidity makes it more appealing to both beginners and experienced traders.
- Resources – In today’s modern computer world, resources are widely available. Including information regarding the USD/JPY pair. Traders can now monitor bar charts, exchange rate history graphs, and more. Traders can easily do technical analysis from a streaming chart. Also, blogs about the online trading community are available for everyone. And, some website caters hourly forecasts for market reviews. With the benefits and the availability of resources these pairs have, it has become one of the most actively traded currency pairs in the world.
Drawbacks Of USD/JPY
After discussing the reasons why traders trade with USD/JPY pair. Since risks are always present in the trading industry. We will also help you to be aware of the drawbacks of USD/JPY:
- BoJ Intervention – Traders must keep an eye on the intervention of the BoJ specifically when price action and movements may threaten the growth of the economy and the Japanese export industry. It is to avoid a short sharp, and expensive surprise.
- Volatility – It is not a surprise that this volatility is also one of the drawbacks. Fluctuations are normal in trading, so traders need to be vigilant when there’s again; loss is also present. An example of this is a natural disaster that can hugely impact the currency pair. A severe degree of risk has also seen in this pair.
- Leverage – Borrowing funds enable traders to capitalize and diversify their funds to focus on winning opportunities. But, the dangers of leverage are more visible, primarily when margin trading is used with volatile pairs like USD/JPY. And can cause serious capital loss.
- Automated Competition – Traders are facing a challenge in trading algorithms. There are intelligent bots that use yearly charts and the latest drops to create forecasts. Traders are still drawing patterns of heads and shoulders manually. On the other hand, these bots already know the estimates for competitive rates of USD and JPY for the coming weeks. Being aware of these challenges, ’ traders must do their part to study and learn how to conduct a thorough market analysis. It is in the trader’s ability to lessen or even avoid these challenges.
Influences On Movement
Accurate chart investing for USD/JPY requires an understanding of the movements and their causes; this must be done in a very detailed manner. These are the most significant influences:
- Economic Strength – This is the greatest influence for both USD and JPY in this relationship. If one economy suffers, the other will likely be strengthened. Economic indicators are as follows; Unemployment rates, wage growth, and industrial production.
- Japanese Imports vs. Exports – If Japan’s import is more than their exports, the rate of the US dollar is likely to increase against the Japanese Yen, Japan’s economy is in the process of purchasing rather than selling. In addition to that, being a huge exporter, Japan’s trading relations with other countries such as China can also make an impact on the USD/JPY trading.
- Natural Disasters – Natural disasters can affect both countries’ economic growth substantially. With Japan’s size, it is the one who will be more affected; on the other hand, the US economy is unlikely to be impacted to a greater extent.
- Currency Growth – Generally, the growth of the US economy is much faster than Japan’s. In reality, the Japanese Yen has a history of growing slowly in the past years. For that reason, there has been a record of the Japanese Yen’s downward trend to the US dollar consistently.
- Government Intervention – While the US Federal Reserve and the BoJ are the ones who are monitoring the monetary policies. The government can intervene anytime they want, so traders need to pay close attention to any news regarding the new measures, for instance, about interest rates, quantitative easing, and inflation.
In conclusion, knowing what can influence the rates of these currencies, traders can balance and recognize trade opportunities for the USD/JPY currency pair. With this knowledge, traders can somehow predict whether the price will start going up or down.
Currency pairs are correlated to some currency pairs; the USD/JPY is not exempted. The USD/JPY pair is correlated with the USD/CHF and EUR/USD pairs for having the highest correlation in the market. These correlations are, first positive, and the second is negative.
- Positive Correlation – The pairs, GBP/USD, AUD/USD, and EUR/USD are all correlated. In this case, the US dollar is the counter currency, so whatever changes happen in the US dollar is visible in all pairs. It is how currency reacts in line with each other.
- Negative Correlation – The moment a currency pair moves opposite from each other, they are negatively correlated. And this is more visible in the USD/JPY, USD/CAD, and USD/CHF pairs. In this correlation, the base currency is the US dollar.
Being aware of the correlation of the US dollar and Japanese Yen can help any traders to reduce risk while improving trading instruments. Understanding that other currency pairs are correlated with USD/JPY, traders can also predict fluctuations based on the fluctuations of different currency pairs.
The following are some Japanese Yen pairs which are highly correlated to the USD/JPY:
The Correlation Of USD/JPY And Gold
Due to the use of gold in the electronics industry, though gold is not a currency, traders need to understand the product of electronic trading and its capabilities. Electronic trading is being traded the same as USD/JPY. Unfortunately, USD/JPY and XAU/USD (gold/US dollar) are negatively correlated. It only means that the higher the USD/JPY moves, the lower the gold gets.
Analyzing the basics of support and resistance levels technically will give traders the ability to learn how to utilize the correlations of currency pairs. Whether the correlation is positive or negative, it will provide any traders a chance to create higher returns and turn it into a profit.
Strategy In Day Trading With USD/JPY
In day trading forex space, the right timing is everything. Traders can capitalize on USD/JPY during prime-time slots. The suggestion is, traders must focus on quality rather than quantity.
Searching when currency pairs’ prime-time is very helpful for traders. London and Europe can affect different currencies to be traded actively; when New York businesses open, it creates a more significant momentum for the US and Canadian dollar.
USD/JPY, on the other hand, doesn’t co-occur with this trend, due to Japan’s eastern pacific time. This pair’s prime-time happens between 1200 and 1500 GMT.
So, remember this specific time for the USD/JPY pair to maximize your profit gain potential and also to benefit from the tightest spreads.
Rise and Shine
In this strategy, preparation is your key to success. If you are determined to do day trading, learn the basics of day trading. Waking up early and prepare before the market opens, keep in sight all the historical exchange rate and an economic calendar. Talk to your fellow traders about their predictions through forums and share yours.
In the forex world, it is suggested to work outside the regular market hours.
Moving Average Cross And Bounce
Spikes between 20 to 40 pip range is visible, minutes after the market’s open. A straightforward strategy with USD/JPY day trading is to do a simple moving average cross and bounce. It is strategy is best within a 4-hour candlestick chart.
MA (50/200) and BB (20) are the indicators you will be needing.
Buy Entry Rules
- BB (MA20) must reach MA (50) or better higher.
- Price must be higher on both BB (MA20) and MA (50).
- Test the price of BB (MA20) to support a higher MA (50).
- Bullish confirmation candle is needed from support.
- Finally, enter a buy entry.
Sell Entry Rules
Traders will only look for the exact opposite of the buying rules.
In minimizing risks, traders need to incorporate stop-losses. Monitoring while allowing the price to move in the trade direction, traders must learn when to move stop-loss from bottom/top to top/bottom. Repeat the moving of the wick until the price stays above/below MA (20).
With the help of the latest news, traders have a way of monitoring and predicting whether the price will go up or not.
Live news updates, as well as recommendations; daily, weekly, and monthly forecasts, along with news provides technical analysis and their commentary. Following these popular networks is a big help:
Whatever your strategy in trading USD/JPY, having awareness on the latest update in forex space is a huge help to improve your technical analysis skills.
Japanese Economy And Japanese Yen
Understanding past key events in this relationship can help traders’ predictions and forecasts accurately.
First, the country of Japan, yes, Japan’s geographic size may cause them to lack natural resources, but due to people’s work ethic, technology success, and their techniques in manufacturing. Japan’s economy has flourished since the damage that occurred after World War II. Today, Japan’s economy is next to the US and China.
In the early 1990s, the Japanese economy is in its hard times because of the real estate and domestic equity significantly raised. And the economy has reached a substantial deflation.
The Japanese government and BoJ played a significant role in the nation’s economy in the last twenty years by introducing several measures on how to rejuvenate their nation’s economy.
Understanding the history of a nation’s economy will give traders an idea on what previous factors have influenced the economy and how they achieve economic growth. And it will provide traders with a brighter future forex outlook that can result in more accurate predictions.
The introduction of Japanese Yen in July of 1871, it flourished and became the currency that is most traded in Asia. Japanese Yen now is the third most traded currency in the world, next to the US dollar and Euro.
To sum it up, USD/JPY traders need to monitor the economic information of Japan to gather new information. To strengthen the Japanese Yen is to have a rise in its rates and to diminish its popularity carry trade, which is not happening.
This currency is the standard monetary unit of the US for over two centuries. While the Japanese Yen and the economy has affected severely because of World War II, the US economy flourished a few years after the war, partly because of the 1994 Bretton Woods Agreements.
Historical graphs show the exchange rate data of USD/JPY and the evidence that the agreement played a massive part in the US dollar’s success to be secured. And with this agreement, the US dollar has been established to be the world’s official currency.
USD/JPY Recent History
In recent years’ graphs show significant fluctuations in the relationship of USD/JPY. Like other currencies, ups and downs are normal. Here are some impressive results in the year of 2013:
- The US dollar once had an impressive 87% of all forex trades.
- The largest increment in trading activity happened to Japanese Yen, rising 63% from 2010 over other major currencies.
- The total FX turnover for USD/JPY trading reflected 18.3% in April of 2013.
Both currencies have had their moments of increase in recent years. Nevertheless, learning the causes in their successes and shortcomings enable traders to predict and react better to future reports.
To sum it up, the USD/JPY currency pair is second in the ranks for liquidity. This currency pair assures day traders to yield profits based on its volume and volatility requirements. Understanding the competition in the market and all the forces at play are needed to establish a more significant edge in the trading industry. In every trader’s part, conducting expert analysis is required, use all the resources you have, such as daily, weekly, and historical charts, and create accurate projections. Asking brokers about your style is a must for you to learn from people who have better knowledge than yours. Applying and utilizing the information you gain may help your forex profits generate more gains.