Secrets of EURJPY or how to trade the “Beast”

Good time of the day, fellow forex traders!

Today we will talk about how to trade EURJPY - one of the most dangerous, but also the most popular cross - currency pair in the Forex market. Quite a large percentage of profitable traders include it in their trading arsenal. Peculiarities of this pair, sometimes called the “beast”, the most relevant strategies, macroeconomic background and other nuances - in this article.

Economy of Japan and the Eurozone

In the early reviews, when talking about the USDJPY pair trading, we already mentioned the peculiarities of the Japanese economy. And, since then, the long-term outlook has only slightly changed the angle, but the nature of the trend itself has by no means changed. Nevertheless, we will quickly refresh it in memory, noting the most noteworthy factors affecting the dynamics of the JPY and EUR rates.

Japan has the third-largest GDP in the world, only after China and the United States. The country is a producer and exporter of cars and high technologies and is therefore very sensitive to energy prices.

Its Central Bank, the Bank of Japan, is a joint-stock company, where 45% of shares are held by private and institutional shareholders. Interest rates alternate between negative and very low: -0.1% to 0.1%, which makes loans in yen extremely popular.

Japan traditionally struggles with the high yen rate and low inflation to make Japanese exports more competitive. Earlier this was achieved due to so-called currency interventions, and many traders had a chance to make good money, foreseeing the moment of the next sales by the Japanese Central Bank, but today the inflation increase is achieved through stimulating programs - purchases of long-term government bonds and other financial assets from the Central Bank.

The euro is the official currency of the Eurozone, consisting of 28 EU member states, and one time came to replace another European currency unit (ECU) used in the currency system of the EU and the EU in 1979-1998.

Between these 28 states of the Union, there is a single market, which economy accounts for 21% of the world production by 2010, which puts it in first place at the nominal value of GDP, making it the largest exporter and largest importer of goods and services.

The main managing bank, the European Central Bank, regulates the monetary policy of the countries entering the euro area, maintaining overall price stability. In the long term, the ECB’s policy pursues similar goals to the Bank of Japan - accelerating inflation through incentive programs.

Global trend

Since late 2014, a downward trend has been observed. It was then that the consumer price index of the euro zone moved into the negative zone (from 0.9% in 2013 to -0.2% by the end of 2014), due to protracted recessions in France and Italy. There has not been any significant recovery since then, and the situation has only been exacerbated by the escalation of Euroscepticity in individual countries of the Union, which eventually led to Brexit (a split with the UK), followed by the mobilization of similar initiatives in political circles in France and Italy.

At a greater distance, it can be seen that this was not always the case, and the strongest upward trend in the post-crisis 2012 is proof of this. As for the prospects of the EU and the Euro as a whole, we will leave this issue to the attention of all possible political technologists. But, the risks of the collapse or at least of an exclusive modification of the Union are visible to the naked eye and are taken into account by global investors today.

Based on these observations, it is worthwhile believing that the downward trend will continue in the coming years, and therefore, when trading on the daily charts, the advantage remains for signals directed downwards. Of course, the situation may change, but based on the data available today and the dynamics of recent years - the global trend shows downward perspectives.

Swaps

The swaps for this pair are insignificant, and therefore, it will not be possible to earn or lose money on them, so we will leave this issue without detailed attention.

Pip Cost

The pip cost is slightly different from the standard pairs (at the time of writing the article at a 0.1 lot, one point costs $ 0.9), and this should be taken into account when calculating the risk. The pips are slightly cheaper than on pairs like EURUSD or GBPUSD.

Pair Volatility

The average daily EURJPY volatility within the last two years is approximately 115.44 points. The most volatile days are Thursday and Friday.

The greatest intraday volatility is observed in the American session at 17:00 GMT and slightly less in the European and Pacific sessions. But, it is worth mentioning that there is no such a strong dependence on the sessions as in the case of EUR and GBP, and therefore activity can be expected at any time of the day.

Correlations

The most stable correlation is observed with the USDJPY pair on 4-hour charts. Therefore, if you find a signal on this pair that has not yet played on EURJPY, then perhaps you should prepare to enter the position.

In turn, USDJPY, as we recall, correlates well with the Japanese stock market, namely, the Nikkei 225 index:

And, correspondingly, similar correlations EURJPY will have with Nikkei 225 - due to a close correlation with USDJPY. Which is observed below:

Also, there are moderate correlations of USDJPY with oil, and, accordingly, slightly less moderate between EURJPY and oil, which you can also try to use in your strategy.

Economic calendar

When working with an economic calendar, it is important to keep track of news related to the European currency and Japan, as well as the US dollar, paying attention to the most volatile ones, which are indicated by three red dashes.

Speaking about the news background, it will also be important to note that cross-pairs such as EURJPY or GBPJPY respond more smoothly to the news on USD, as they are less popular among traders and investors who prefer to risk at such hours trading EURUSD or, say, USDCAD. There are much less false changes.

Features of the EURJPY pair trading

We have already analyzed the strategies with correlation and it remains to add a few more noteworthy nuances that will help to better understand the specifics of the EURJPY trade.

The pair is universal and perfectly suits for both scalpers and for those who trade on the trend - both on long timeframes and on short ones. But, judging from the point of view of practical popularity, we will say that intraday trade, of course, prevails over trade on the daily charts.

For those who quickly scanned EURJPY hourly charts, it might seem that there are no stable trends, in particular, because of the abundance of rises and falls. However, if you open the daily chart, it becomes clear that such an assessment of the situation is a significant simplification. On the daily charts, strong trends are clearly visible, which opens up acceptable conditions for long-term trading.

Also, there is an opinion that recognition of emerging trends on the pair by technical indicators is particularly good. It is because of the sharp movements characteristic to EURJPY that the indicators, which are usually late, start to work faster. And therefore, if you have an indicator strategy that did not work for EURUSD or for GBPUSD, you should try it on this pair.

In addition, due to the relatively greater volatility of the pair compared to EURUSD, and characteristic sharp movements, the EURJPY trends are more visible and are longer.

It should be noted that for this pair, you may also need to increase the stop loss - because of the “emissions”, where it is just necessary to place it far away at low timeframes, otherwise, there are risks that they will be knocked out. Such pictures are typical up to H4, but on D1 the picture is no longer so frightening.

For those who are interested in the opportunity to trade on sharp movements, I can recommend opening opposite small positions after each long tail and shadow. They excellently work out both intraday and on the daily charts.

Breakout trading systems also work well at the same exit from consolidation strategies, allowing taking a good profit. Boxes are viewed with the naked eye, but here it is also worthwhile to set up the indicators properly so that they take into account these tails and shadows.

Well seen and worked out are such figures as bullish and bearish flags - you can confidently look for them on the EURJPY chart.

Summarizing

• The EURJPY pair is perfectly and universally traded both intraday and on the daily timeframes;
• Take into account sharp movements and tails that can easily knock out your stop loss. And therefore, calculate the latter - with the corresponding correction for higher volatility;
• The same tails of candles can be used for your own good, opening opposite small-scale positions after long tails;
• Breakout strategies work well, in particular - the “bull flag” and “bear flag” figures;
• More pronounced trends than classical pairs, such as EURUSD;
• There are correlations with USDJPY, and also the stock market Nikkei 225.

Take care, Michael

ForexTraderPortal.com