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Currency Pair Trading: How and When to Trade USD/JPY

   

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With high liquidity and low bid-ask spreads, USD/JPY is a popular currency pair for experienced traders as well as beginners. Since the financial crisis in 2008, Japan’s yen has demonstrated itself as a reliable reserve currency, becoming the world’s third-largest safe-haven currency in recent years. The USD/JPY pairing also plays an important role in trading activity throughout Asian markets, because JPY is often bought or sold as a substitute for more unpredictable currencies in the region.

Because JPY is the leading reserve currency in the Asian markets its high liquidity is a benefit to traders looking to capitalize on market movement in countries whose currencies would otherwise be tougher to trade—especially at a large volume. Even though the USD/JPY pairing offers greater stability and liquidity than other pairings, traders should still study the market factors that can affect its price movements.

Here’s some insight into the timing considerations and other market influences to watch when trading USD/JPY.

Advantages and Disadvantages of Trading USD/JPY

One of the greatest advantages of USD/JPY is its high daily liquidity, which creates volatility that generates frequent trading opportunities. Because USD/JPY is strongly correlated to the Japanese commodities market, the price swings created by the pair’s liquidity make these price movements easier to predict than those of other currency pairs.

USD/JPY also features low bid-ask spreads, compared to other prominent currency pairs. These low spreads encourage trading and increase your potential profits. But there are also drawbacks to consider when placing a trade, starting with the volatility of this pairing. Compared to other major currency pairs, the volatility of USD/JPY prevents it from functioning as a safe-haven pairing. Although profit opportunities can be regularly found, this volatility can also lead to quick, significant losses if you aren’t paying attention to the news cycle.

USD/JPY is heavily influenced by the news cycles in both the United States and Japan, so traders targeting this pair will need to stay on top of economic news from both countries if they want to leverage the volatility without becoming victims. In the chart below, for example, a rough week of economic news in the United States led to a sharp multiday decline for USD/JPY, which hit a new low Sept. 18:

When to Trade USD/JPY

In general, USD/JPY trades should be targeted during periods of peak activity. These ideal trading windows represent the best potential for profitable price movements. Keep in mind that even though forex trading is available 24 hours a day, smart traders are diligent about timing their trades to hit their peak trading windows.

First things first: There are time periods during the day that you almost always want to avoid. Unless unusual market factors require an urgent reaction from the trader, it’s best to avoid trades between 03:00-05:00 GMT, when the Tokyo market is nearing the end of the day and both the London and New York markets have yet to open.

Another quiet period to avoid is 21:00-24:00 GMT, when the New York market has just closed, London is asleep, and the Tokyo market has not yet opened. A quiet market rarely offers good trading prospects. Even if you’re able to turn a profit, most or all of those earnings could be eaten up by commissions.

Best Time to Trade USD/JPY

That said, the ideal window for USD/JPY trading is generally 12:00-15:00 GMT, when market activity is at its highest level. Both the New York and London markets overlap with this window, and trading activity tends to be at a high level even though the Tokyo market isn’t open for the day. The chart below illustrates the dramatic USD/JPY trading volume between the 12:00 GMT mark and 15:00 GMT, and sometimes even a little later:

The volatility in this trading window represents better profit potential while spreads remain tight and liquidity is high.

Keep in mind that although this trading activity comes shortly before the Japanese market opens, the trading activity is driven by the open U.S. market at that time. The U.S. market, then, tends to have a greater influence on global trading volume for USD/JPY than the Japanese market, which benefits traders who are active during U.S. open hours.

Best Indicators for Trading USD/JPY

Because volatility and volume are such big factors for traders looking for USD/JPY trading opportunities, volume indicators can guide their trading decisions. The same is true for the relative strength index (RSI), which helps traders identify overbought and oversold conditions that may hint at incoming volatility for the pair.

The average true range (ATR) can also prove to be useful in evaluating how many pips the USD/JPY pair is moving at any given time. With the ATR, you can leverage the 14-day moving average to achieve greater context when evaluating current price movements and volatility. Similarly, Bollinger Bands and momentum indicators can help traders understand whether the USD/JPY pairing’s volatility is significant enough to warrant trade consideration.

Market Triggers Affecting USD/JPY

Although the USD/JPY pairing tends to be stable, there are market factors that traders should monitor when considering prospective trades. One such market factor is the role of Japanese interest rates. Traditionally, the low interest rates maintained by the Bank of Japan have heightened interest in JPY for carry trades. The Bank of Japan is also known for keeping tight control over these interest rates, maintaining global interest in JPY as a reserve currency. But if the country’s interest rates rise all of a sudden, it would almost certainly depress demand for USD/JPY trades, limiting the liquidity of this pairing.

Other economic factors, such as gross domestic product, wage growth, and the consumer price index, can also affect the valuation of either USD or JPY, thus affecting their appeal as a pairing. Bear in mind, too, that because JPY is heavily involved in trading throughout other Asian markets, economic and political events in China, South Korea, and other Asian countries can affect the strength of the USD/JPY pairing.

Conclusion

USD/JPY is a high-liquidity pairing that plays an important role in Asian market trading. Whether you’re a beginner or an experienced trader, the keys to success with this pairing come down to picking the right time to execute your trades and paying attention to interest rates and other market factors that affect the pairing’s price movement.

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.

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