Currency pairs are categorized into major and minor pairs in the forex market. The world’s largest economies are represented by major pairs, which are frequently the most traded pairs in terms of volume. One such major pair is the USDJPY. The dollar is the base currency in USDJPY trading, whereas the yen is the quote currency. This indicates that the current price of the pair relates to the number of Japanese yen needed to buy one US dollar.
Why should you consider trading the pair?
One, it is a major currency pair, as previously stated. It is the second most traded pair in the world, accounting for about 13% of all global forex trades, according to the BIS. Because of the big volumes, it has a lot of liquidity, which draws both long-term and short-term traders. Brokers frequently offer attractive spreads on the pair due to the vast number of traders on both the buy and sell sides. In reality, spreads of fractions of a pip are fairly uncommon.
To earn money trading currencies, these traders frequently rely on the volatility of a pair. An indicator called the Average Daily Range is used to measure this volatility. When you use this tool to analyze a USDJPY price chart, you’ll notice that the pair has a lot of volatility, which traders might profit from.
Additionally, there is a wealth of analytical data on this pair. Several websites provide regular fundamental and technical analysis as well as market research on the USDJPY, which is particularly beneficial to new traders. Furthermore, the pair’s prices are predictable because of the strong liquidity and trading volumes since trends tend to stay longer and adhere to past support and resistance levels.
Price action strategy
Long trades
In the USDJPY, support/resistance zones and breakouts tend to work effectively. As a result, look for confirmation signals such as a bullish pattern or other bullish signals to enter at established support zones. Breakouts can also be traded effectively using the break, re-test continuation approach on USDJPY.
Also, after a fast sell-off on a powerful bullish reversal candlestick, you can buy a dip. Sharp sell-offs in USDJPY are typically sparked by a risk-off event in the market, but as the dust settles, USDJPY frequently reverses the negative move completely, creating excellent buying opportunities. You can utilize this approach to profit from sharp reversals in the USDJPY.
In a risk-on environment, joining established trends in USDJPY might also be beneficial. Bullish trends can last for a long time, allowing many traders to profit from the movement. Uptrends usually continue for days without a significant retracement. Because it can be tough to find a dip to purchase in USDJPY due to these factors, looking to just join in can be a better technique in such scenarios.
It is important to set stop losses and targets when trading. In this pair, it depends on the reasons for entering the trades and whether USDJPY is trending or ranging in that situation. Stops are usually placed behind a solid support area and target at a significant resistance to the upside.
Short trades
Breakouts of critical support levels are uncommon unless there is a compelling explanation. It will be either JPY strength or USD weakness. Fake-outs are uncommon on the pair; thus, if a negative breakout has occurred, additional bearish continuation is expected.
Look to join the accelerating bearish trend. Sharp negative moves in the USDJPY are most commonly caused by risk aversion, but such moves rarely endure long. As a result, it’s best to act quickly and profit as soon as a support level or a bearish target is met.
When downtrends gather momentum, the price action takes on the characteristics of a trending market, allowing trend-trading systems to enter. However, bearish moves on the USDJPY are more volatile and faster than positive trends.
Place stops above a resistance level, or if the market is moving, trailing the stop lower might be a good risk-management approach. Key support areas lower can be used as targets.
Using economic data releases
The following economic releases affect the pair.
Interest rate differential
Every economic zone has a central bank that determines the currency’s interest rates. The Federal Reserve sets interest rates for the US dollar, while the Bank of Japan sets rates for the Japanese yen.
The difference between the interest rates of two currencies that form a pair, such as the USDJPY, is known as the interest rate differential, and it is one of the key factors that influences the pair’s price movement.
Policies of Central Banks
Apart from interest rate choices, central banks are also in charge of monetary policy, which has an impact on the USDJPY exchange rate. Inflation rate decisions, money flow decisions, and quantitative easing are all examples of these policies.
Economic indicators
The US Nonfarm payroll report, trade data between the two nations, quarterly GDP, manufacturing and industrial production figures, and retail data are all major planned news items to keep an eye on.
Political events
Depending on the significance of the event, political events can influence exchange rate price movements both in the short term and potentially over the long term.
Trade when the volatility and trading volume is high
When it comes to trading the USDJPY pair, or any other pair for that matter, the best moment is when the traded volume and volatility are at their peak. This is because high volatility creates more profit opportunities, and brokers give the narrowest spreads during these times.
For most of the trading day, the USDJPY pair is characterized by moderate volatility. During the Asian session, however, the pair’s volatility rises as the majority of traders enter the market. This occurs between 11:00 p.m. and 8:00 a.m. GMT.
Using currency correlations
Positive correlation – This is when currency reacts in line with each other. USDCHF is positively correlated to USDJPY.
Negative correlation – This is when currency pairs move in the opposite direction. EURUSD is negatively correlated to USDJPY.
These correlations can often lead to good trading opportunities in the pair and should not be overlooked.
Conclusion
In the foreign exchange market, the USDJPY is the second most traded pair. As a result, it has high volatility and tight spreads, which means it has a higher chance of earning from its bets. The Bank of Japan and the Federal Reserve, as well as other economic announcements from both countries, are the main drivers of price fluctuations in the pair. It is positively correlated to USDCHF and negatively correlated to EURUSD. The New York and Tokyo sessions are the best times to trade the pair.