EUR/JPY Trading Strategy: Secrets Behind Trading Cross-Pairs
The EUR/JPY trading strategy gives forex traders the option to get exposure to more trading opportunities. If you want to learn a simple EUR/JPY Forex trading strategy that will tell you the best time to trade the EUR/JPY cross-pair, you have landed in the right place.
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If you want to learn how to trade forex, there are some things that you should know before you risk any of your hard-earned money. Learn more about forex trading by reading this guide: Forex Trading for Beginners, or this one Forex Trading 101.
Thanks for your patience, letโs continue learning the EUR/JPY Trading Strategy.
Table of Contents
Introduction: EUR/JPY Trading Strategy
The number one mistake a forex trader can do is to only focus on the USD cross pairs. While the major currency pairs are more stable, they are also limiting how much money you can make. Even during times of crisis, the Japanese Yen (JPY) is very stable. Consequently, during periods of global chaos, trading the Yen can be very useful.
Throughout this guide to trading EUR/JPY weโre going to share with you a simple EUR/JPY forex trading strategy that works.
Why EUR/JPY Trading is Profitable
Many people donโt know the difference between cross-currency pairs and major currency pairs.
The problem is that forex traders donโt know the advantages of trading cross-pairs.
If you still feel lost,ย here are two advantages of trading the EUR/JPY currency pair:
- EUR/JPY price action is smoother than major pairs. Cross pairs can develop stronger trends compared to the major currency pairs. The conclusion is that currency crosses are โtrendyโ
- US dollar-based currencies are prone to spikes in prices due to US news releases. The EUR/JPY pair can give you the advantage to insulate your trades from these spikes in price
If youโre a trend-following trader, trading EUR/JPY may be easier than trading currencies like EUR/USD or GBP/USD. If you want to get some additional information about Trend Following, Check Michael Covel, he has great insight.
Strong trends only develop 30% of the time in the forex market. With such odds, the market is inherently stacked against the retail forex trader. So, choosing the right currency pair to trade is important.
If youโre wondering:
What are the most trending currency pairs?
Certain currency pairs tend to exhibit stronger trends than others.
When ranking currency pairs based on the rate of change, we can note that currency pairs such as GBP/JPY and EUR/JPY trend more than the other pairs.
Below you can see a case study of the average weekly rate of change for the most traded currency pairs:
The weekly statistics have revealed that the average rate of change in EUR/JPY is 1.24% over the past five years. The EUR/JPY is actually the second-best currency pair that is trading. As you can see, the Yen is included in 3 of the 4 most trending pairs.
Sounds good, donโt you think so?
However, ย measuring the average rate of change has its drawbacks.
Now, donโt worry.
We have made a new study measuring the average number of higher highs and higher lows (lower lows and lower highs) to determine if the EUR/JPY pair is developing strong trends or not.
Note* An uptrend is characterized by a series of HH followed by a series of HL. Conversely, a downtrend is characterized by a series of LL followed by a series of LH.
According to our weekly statistics, the best-trending currency pairs are GBP/JPY and EUR/JPY.
See the chart below:
Now, if these EURJPY forecasts are correct, we can develop a profitable EURJPY trading strategy. Once again, it is clear that the Yen is among the leaders.
Now, letโs discuss how to trade EURJPY because not all the forex pairs are the same. And, it all comes down to how currency pairs are quoted.
See below:
How to Trade EUR/JPY?
In the spot Forex market, trading a cross pair involves something called legged.
Now, letโs define what is a โlegโ in FX trading.
For example, to create a EUR/JPY trade, two other major pairs are traded.
So, how this works in practice?
If you want to trade EUR/JPY, the bank will need to buy both EURUSD and USDJPY to create the EUR/JPY cross.
You have to keep in mind that when you trade major pairs it involves two transactions.
Well, EUR/JPY trading involves 4 legs, thatโs four transactions.
Here is how the EUR/JPY trade is constructed:
- The first leg involves buying EUR and selling USD
- The second part of the leg youโre buying USD and selling YEN
The two USD transactions (buy and sell USD) are canceling themselves out, leaving you with long EUR and short YEN. This is effectively going long EUR/JPY.
Now, this raises another question:
โHow can this influence your trading?โ
Well, if youโre trying to make a EUR/JPY forecast, you need to spend an equal time analyzing EUR/USD and USD/JPY charts.
Our simple EUR/JPY forex trading strategy will incorporate these trading concepts and will teach you how to analyze EUR/JPY through EUR/USD and USD/JPY charts.
Now, before we reveal our EUR/JPY trading strategyโฆ
Letโs see what is the best time to trade forex pairs, such as the EUR/JPY pair.
See below:
Best Time to Trade EUR/JPY
Now, the forex markets operate around the clock 24 hours a day, five days a week. However, there are prime times when trading EUR/JPY can generate more profits. And, itโs tight to volatility and liquidity.
The volatility will help you overcome the cost of the spreads. So, itโs important to pick the right time to trade currency pairs.
In general, the best time to trade EUR/JPY is during busy news releases at 8:30 AM EST and when the London session and the New York trading session overlap and keep the markets liquid and active.
Planning ahead of the economic releases by doing some EUR/JPY fundamental analysis can yield you better EUR/JPY forecasts.
Now, letโs discuss one of the most elementary methods to calculate the best time to trade EUR/JPY.
We can rank the currency pairs by the average hourly volatility as measured in pips. If youโre interested to see what is the best hour to trade EUR/JPY, please check the graph below.
According to our hourly statistics, the best hour to trade EUR/JPY is 15:00 GMT. On average, at 15:00 GMT, the EUR/JPY volatility is 21.4 pips.
Note* to construct the EUR/JPY average hourly, we used one yearโs worth of data.
Now, knowing the EUR/JPY hourly volatility may be good if youโre a day trader.
But, what about if youโre a swing trader?
Then, knowing the EUR/JPY volatility in pips per day of the week can be more useful. When we ranked the days of the week by the average volatility, we discovered that the best day to trade EUR/JPY is Thursday.
According to the daily volatility, as measured in pips, on Thursday, the EUR/JPY pair generates on average 85 pips. So, thatโs the best day to trade EUR/JPY cross-pair.
Thursday is the most volatile session for EUR/JPY and thatโs where the big money is made.
Now, if we take it one step forward, we can also look at the EUR/JPY yearly volatility. This will help us better assess the overall volatility.
Study the EUR/JPY volatility chart below:
Letโs now learn how to trade EUR/JPY with the experts and follow their analysis and strategies.
Letโs get startedโฆ
Simple EUR/JPY Trading Strategy
All you need to know about trading the EUR/JPY trading strategy will be outlined in this section.
Weโre going to use currency correlation, so we can do EUR/JPY forecast.
We already established that trading EUR/JPY cross involves trading EUR/USD and USD/JPY at the same time. First, weโre going to show you a smart way not to get trapped in the wrong trade.
Why?
Because knowing when to stay out of a trade is as important as knowing when to enter the market.
โThere is a time to go long, a time to go short, and a time to go fishing,โ a trading quote from Jesse Livermore, one of the best traders of all time.
So, the best time to sit out of the market is:
- If EUR/USD is going up and USD/JPY is going down, you definitely donโt want to trade EUR/JPY
- If EUR/USD is going down and USD/JPY is going up, you definitely donโt want to trade EUR/JPY
In both cases, the EUR/JPY would be flat.
See the EUR/JPY chart below:
This is a good methodology to use when trading cross-pairs because it will teach you how to stay out of a bad trade.
Letโs move onโฆ
For our EUR/JPY trading strategy, weโre going to use the three currency pairs (EUR/JPY, EUR/USD, and USD/JPY) that form a closed loop.
Noting on the market can happen that will affect one of these currencies that you will not see within those three pairs.
In other words, the price action of the three currency pairs depends on each other.
Before you attempt to do any EUR/JPY buy or sell trades, please consider our EUR/JPY โperfect storm setup.โ
The perfect storm setup involves using cross-correlation trading.
The EUR/JPY long trade setup must satisfy the following trading conditions:
- EUR/USD must be hitting support and rallying
- And USD/JPY must be hitting support and rallying
See the EUR/JPY chart below:
Conversely, the EUR/JPY short setup must satisfy the following trading conditions:
- EUR/USD must be hitting resistance and subsequently selling off
- And USD/JPY must be hitting resistance and subsequently selling off
See the EUR/JPY chart below:
The reason why this simple EUR/JPY forex trading strategy is so powerful is because, when the EUR/USD and USD/JPY go up (and vice versa when EUR/USD and USD/JPY go down) there is nothing else EUR/JPY can do but go up (down).
As a rule of thumb, before you are getting into a EUR/JPY trade, you want to look for the โperfect storm setupโ to develop across all three currency pairs.
The strategy is not complete without having a protective stop loss and an adequate take profit target.
Check out our complete guide to stop-loss trading here: Stop-Loss Trading Strategy โ 2 Tips To Safe Your SL.
If you need help with the take-profit strategy, check out: The Secret of Taking Profit and Why it is Important.
Final Words: EUR/JPY Trading Strategy
In summary, the majority of the currency pair available for trading are cross pairs so, itโs important to develop a unique forex trading strategy to tackle cross-currency pairs. Our EUR/JPY trading strategy can be used as a model to basically trade all your favorite Forex cross-pairs. When you combine this simple EUR/JPY forex trading strategy with the best time to trade EUR/JPY, you can have a killer setup.
If you canโt trade during the most active EUR/JPY hours, try swing trading on Thursday, which is the most active trading day for the EUR/JPY pair. This may be a better approach for you.
Our EUR/JPY trading strategy can serve as a starting point along with the other EUR/JPY statistics, so you can develop a strategy that fits your personality.
Thank you for reading!
Feel free to leave any comments below, we do read them all and will respond.
Looks good I shall try it and keep you posted
Thanks
How did end up?? Currently sitting at -ยฃ180.00 as thought it would be going up but went complete opposite
So you mean that the strategy didnโt work?
Brilliant.
Bery powerful strategy
very good education indeed. You guys are inspiring
Very informative, thought provoking.
Love what Iโve discovered.
Great discussion-will use it for sure-thx
Hi there! This post couldnโt be written any better! Reading through this post reminds me of my previous room mate! He always kept talking about this. I will forward this article to him. Pretty sure he will have a good read. Thank you for sharing!