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Forex Trading

How to trade the USD JPY


September 1, 2021
How to trade the USD JPY

Like all the major currency pairs, the USD JPY currency pair has high volatility and tight spreads that provide plenty of opportunities for forex traders.

However that is not the only reason that USD JPY piques the interest of traders. The pair also has high liquidity and low bid-ask spreads, making it even more popular in the market.

But what exactly is the USD JPY and how do you trade it?
In this article, we are going to discuss all things that traders need to know about the USD JPY pair, starting with its definition.

What is the USD JPY?

The USD JPY is an abbreviation of the currency pair that is formed from the US dollar (USD) and the Japanese Yen (JPY). The pair, which has USD as its base currency and JPY as the counter currency, represents the exchange rate between the USD and the JPY.

In other words, the value of the pair shows how many JPY are needed to buy one USD. For example, if the USD JPY pair is valued at 155, it means that to buy one USD, a trader will require 155 JPY.

Because the USD JPY is made up of the most traded currency globally (USD), and the leading reserve currency in liquidity (JPY), the pair is one of the most popular pairs in the forex market.

As a result, it has large trading volumes that attract all kinds of traders, whether they are day traders, swing traders, position traders, or scalpers.

However, this does not mean that trading the USD JPY pair is easy. If anything, its popularity makes trading the pair even more challenging.

Before trading, traders should ensure they know all there is to know about the pair, starting with the market factors that influence how the pair is traded.

Major Economic Factors that Influence USD JPY Trading

There are several economic factors that influence the currency markets and the value of the USD JPY pair and consequently how the pair is traded. Some of these factors are:

  • Interest Rate Differential

    Every economic zone has a central bank that sets interest rates for its currency. In the US, the Federal Reserve sets the interest rates for the USD and in Japan, the Bank of Japan sets these rates for the JPY.
    When two currencies form a pair, like the USD JPY, the difference between their interest rates is called interest rate differential and it is one of the major factors that influence the pair’s price movement.

  • Central Bank Policies

    Apart from making interest rate decisions, the central banks are also responsible for making monetary policy that can affect the USD JPY exchange rate. Some of these policies include inflation rates decisions, money flow decisions, and quantitative easing.

  • Currency and Commodity Correlations

    The USD JPY shares negative and positive correlations with some forex pairs and some commodities. Using the price movement of these correlations, traders can make trading decisions concerning the pair.

  • Economic Indicators

    Major economic indicators like the NFP, GDP and retail data can influence how traders view the strength of one currency relative to the other and hence the forex trade and the forex movement. USD JPY trading is no exception.

  • Political Events

    Political events affect the economy and consequently, also affect the strength of currencies like the British Pound, Swiss franc, Japanese Yen and the US Dollar.

How to Trade USD JPY

Now that we have established some of the factors that influence USD JPY trading, let us take a look into some of the trading strategies that can be used to trade the pair. It is important to note here that any trading strategy is down to the individual trader. The strategies presented below are for reference only and not intended as any kind of trading advice.

  1. Price Action Trading Strategy

    In this strategy, traders solely rely on the price action to make trading decisions and ignore other factors like trading indicators and economic data releases.
    Price Action refers to a plot of a security’s price movement (in this case the USD JPY) against a specific time period.
    Because of the high price stability and the risk sensitivity of the USD JPY pair, its price action tends to have a gradual upward movement (bullish trend) and sudden and sharp reversals (bearish trends) or breakouts.
    In the Price Action strategy, traders choose to either buy or sell the pair depending on the movement of the trend.
    For example, if the trend is bullish and the current data plus the retest strategy proves that it will continue that way, traders place long trade entries. In other words, they buy the USD JPY pair.
    On the other hand, if there is a bearish breakout and current data is proving that the bearish trend will accelerate, traders place short trade entries. In other words, they sell the USD JPY pair.

  2. Trading using Economic Data Releases

    In this strategy, the traders make trading decisions based on the data releases of major economic indicators like the GDP, unemployment rate and retail sales.
    There are three ways in which the USD JPY traders make decisions based on the economic data releases – proactive approach, reactive approach and mixed approach.
    In the proactive approach, traders do not wait for the release of the data before placing their position. Instead, they use forecasted data and market sentiment to make trading decisions.
    The reactive approach, on the other hand, works in the opposite way. In this approach, traders place their position after the data is released.
    A mixed approach, combines both these strategies. The traders base their decisions both on the forecasted data and the released data.

  3. 1 Hour USD JPY Trading Strategy

    This is a price action trading strategy in which traders focus on the hourly forex chart instead of the whole chart.
    Known for being a simple Asian Session Breakout strategy, the 1 Hour USD JPY Trading Strategy is explicit to the USD JPY pair, and is only used during the Asian trading session – 11 P.M to 8.00 A.M GMT.
    To use the strategy, traders wait for the first-hour candlestick to close on the USD JPY and then they place a sell stop and buy stop on opposite sides. The stops should each be 2 pips from the candlestick.
    As soon as one order is activated, whether it is a buy or sell stop, the trader closes the other order. The strategy aims to see a 20 pip trade.

  4. A combination of RSI, EMA and Candlestick Setups

    In this strategy, the traders use the trading technical indicators Exponential Moving Average (EMA), Relative Strength Index (RSI) and Candlestick setups to determine their trading decisions. Click here to read more about this strategy.

Why trade forex with Tixee

As seen from above, trading the USD JPY could provide many opportunities that traders could see potential from.. However, before jumping into the trade, traders should first explore the different trading strategies and choose one that is most suitable to them.

They should also find the best Forex brokers that will allow them to explore maximum opportunities, not only in USD JPY trading but forex trading in general. Luckily, we have found a broker that ticks the boxes – Tixee.

Here are three reasons why you should create an account on Tixee and start trading forex on the platform:

  • It is affordable. Opening an account in Tixee is free and once you are ready to make a trade, the broker offers accessible account levels.
  • It provides access to three platforms – the MetaTrader 5 platform, a Web-based platform and simplified desktop platform. These platforms have an impressive array of trading features that offer support and guidance for traders of all experience levels.
  • You’re not limited to forex, Tixee has access to over 130 other globally traded assets, including indices, stocks and commodities.

Frequently Asked Questions

  • When is the best time to trade USD JPY?
    The ideal time to trade USD JPY is between 12.00 – 15.00 GMT. During this time, the New York and London markets usually overlap, creating high volatility in the market.
  • What is meant by margin requirement in forex trading?
    It is a leverage amount provided by a broker that a trader can use.
  • What commodities influence the value of the USD JPY the most?
    Oil is the one commodity that greatly influences the USD JPY. This is because both Japan and the US import their oil requirements. Also, gold prices influence the pair.
  • Which currency pairs tend to be most correlated with USD JPY
    EURJPY, CHFJPY and CADJPY are the most positively correlated pairs with USDJPY while EURUSD, GBPUSD and AUDUSD are the most negatively correlated pairs with the USD JPY.
  • Who are day traders in forex?
    Day traders are forex traders that trade on an intraday basis.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.

Categories: Forex Trading

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