August 31, 2022 Updated 2:26 pm
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The pairing of the U.S. Dollar with the Japanese Yen is known as USDJPY. This pairing is one of the most popular in forex trading, making it very liquid because it is heavily traded. The Yen is considered a safe haven–a currency that will keep its value during volatile markets and even increase in price in many cases. The U.S. Dollar is also a safe haven, making USDJPY a go-to trade for many Forex investors. The U.S. economy is the largest in the world, and the Japanese economy is the third largest (behind China), so USDJPY is considered stable and attracts those seeking safety.
When you place an order for USDJPY, you buy USD and sell JPY at the same time. The first three letters–in this case, USD–are called the base currency. JPY in this pairing is the quote currency.
When the Dollar is worth more than the Yenm exchanging JPY for USD gives you more dollars.
The exchange rate fluctuates constantly, but you can clearly see a long downtrend for this pair. This means the Dollar has consistently become closer to the Yen in value. The closer the two currencies are, the less valuable the pair is to traders. If USD gains value and JPY does not, you would see a spike in the price because more traders would want it.
USDJPY ChartScreenshot courtesy of TradingView!
Here is the procedure:
These two currencies can help you gauge the rest of the market. Because so many people trade them, you can get a feel for how the U.S. economy is doing.
When the pair rises in price, the U.S. economy is doing better. When the U.S. has economic troubles, the pair will drop in value.
You can find opportunities as you track the U.S. economic news. You can also track Japan's economy because when the Yen drops in value compared to the Dollar, traders will want more of the pair. They can get more dollars from their Yen.
The USD/JPY currency pair rises and falls with U.S. Treasuries. These are bonds, bills, and notes the U.S. uses to raise money by selling them to investors. With interest rates heading higher, Treasuries follow. This increases the value of the U.S. Dollar, so USD/JPY goes up in price.
This is a popular pair. The "spread," or bid-ask difference is low. Japan and the U.S. are subject to wild swings in their economies. They will fluctuate, but in a more orderly manner than high-risk currencies from smaller countries.
There is just enough volatility to make profits. The trend tends to be smooth, so beginners can start with this pair knowing there will not be extreme peaks and valleys.
Because this pair is so popular, it is "liquid," meaning traders can readily find buyers and sellers. You are not likely to get stuck in a trade you cannot find a buyer for.
These currencies are very active, so you will find a lot of tips and guidelines for trading them. Popularity breeds advice.
This pair can move based on Japanese commodities, so you can look at imports and exports to judge how the market is feeling. High commodity activity would mean Japan's economy will benefit, perhaps raising the value of the Yen
Watch for announcements about U.S. interest rates. When the government raises interest rates, the U.S. Dollar should rise in value, and this might be a good signal to buy. Note, however, that it is best if the rate hike occurs without a rise in the value of the Japanese economy. This will mean the Dollar is higher against the Yen, and investors will want to buy USDJPY, thus raising the price of the pair.
You can see where a pattern is reversing. Study candlestick trading to identify when a downtrend may reverse and go up, or where an uptrend may reverse and go down. Reversal patterns show where the previous trend may be reversing. A downtrend may transition to an uptrend and vice versa. Let's look at the two types of reversals.
Bottoms
This is what a bottom looks like. Prices may rise from here.
You can see that prices turned around and started an uptrend.
Tops
Prices always come down from a peak. You can learn to spot peaks. Here is an example.
Buyers give up and sellers take over. That drives the price down.
There are many types of reversal patterns. See the candlestick trading guide to grow your knowledge of trends and reversals.
Choose some stable pairs that are like USDJPY, especially starting out. Here are some others to consider for your currency trading. Select the currency pairs based on your risk tolerance for risk. A higher-risk pair such as USDJPY is not always the best choice for someone starting out. If you are a new Forex trader, consider more stable pairs:
Avoid putting more than 1-2% of your trading account money into any single trade. This will minimize your losses.
Trading platforms may provide leverage. "Leverage" means the broker loans you money so you can buy more of a currency than your cash on hand might allow. Be cautious. If you have a losing trade, you still have to repay the loan in full. This can eat up your capital and lower the overall value of your investment funds.
Use stop-loss orders. These orders automatically sell your position if it drops to a price you name. You will avoid significant losses this way.
Also, use limit-buy orders. These set the highest amount you are willing to pay for the currency pair. This way, you avoid paying too much if the price spikes temporarily.
Do not make decisions when you are emotional. That means do not panic when you have losses–make a wise decision based on rules you have set for yourself in advance.
The kind of news you should follow is about macro trends. Do not trade every snippet of news that comes out. Many traders overreact to sudden news. Wait and see how prices react. Let the dust settle before you trade.
You can benefit from looking at how USDJPY has responded to major market events. Let's look at some recessions and recoveries and how this pair responded.
The Arab Oil Embargo increased oil prices, setting off a recession. The Fed doubled the federal funds rate. This raised the value of USDJPY because investors found the Dollar more attractive.
Inflation rose to 11.9%, and the Fed raised the fed funds interest rate to 19%. You can see how higher interest in the U.S. drove USDJPY up.
Boom times for the U.S. meant the Dollar was more attractive, and USDJPY rose in price. As the U.S. Strengthened, so did the value of the Dollar.
The economic recovery in the U.S. after the attacks of 9-11 made the Dollar stronger and therefore made USDJPY more attractive.
The U.S. economy and markets recovered strongly from 2021 into early 2022 following the introduction of effective COVID-19 vaccines. By mid-2022, resurgent inflation had led the Federal Reserve to start raising interest rates, increasing recession risks. Investors liked the Dollar as it rose in value partly due to the higher interest it paid.
Predictions are always tricky, because some countries "prop up" the value of their currencies. For example, the Yen recently rallied against the Dollar because the Bank of Japan signaled it may be considering an intervention in the currency's value.
Apart from such interventions, there are some realistic criteria you can use to predict future currency directions for both the Dollar and the Yen.
At some point, the Fed will stop raising interest rates and may even lower them. As supply chains get better, inflation should fall due to the availability of products. A flareup of COVID could dampen the outlook, but overall, watch for rates to fall and the Dollar to weaken in the long term, driving USDJPY down in price.
The Dollar will remain strong as long as inflation and Fed rate hikes continue. USDJPY is likely to continue upward for a while. When rate hikes ease, watch for the Dollar to weaken and USDJPY to come down.
You must decide whether you are a trader or an investor. Here's a rundown of the two approaches:
"Trading" means short-term entries and exits. You might hold a position for minutes, hours, or even a week. You watch for the ups and downs and try to get in on them.
Because USDJPY is somewhat volatile, but not dramatically, short-term traders like it. To trade this way, use indicators that can help you spot favorable movements.
The term "investing" indicates holding a position for at least a year. You can use a shorter timeframe, but the idea is to go for long-term patterns.
USDJPY is known for long trends. The goal is to catch the beginning of an uptrend. Periods of global economic recovery are good places to do that.
Volatile economic times can catch you off guard. Do not buy and walk away. Yes, this pair does have long trends, but news about a recession or inflation should change your expectations.
Pip - "Pip" refers to "percentage in point," sometimes called "price interest point." It is the smallest price an exchange rate can move. Example: USDJPY can make a $0.0001 move.
Exchange Rate - The value of a currency as compared to another one.
Bid/Ask Spread, or Spread - The spread is the difference between the exchange rate for GBP and NZD.
Risk Management - Protecting yourself against loss of money. Short-term traders may watch their positions hourly. Longer-term investors may check positions daily and weekly. It also means placing a stop-loss order.
Stop-loss Order - This sell order triggers automatically when the price drops to a level you select.
Limit-Buy Order - This is the highest price you agree to pay for your trade.
Leverage - A loan from a broker.
Margin Call - A margin call happens when you are losing and the broker asks you to make a payment on the loan he gave you.
Gapping - This is a jump in prices without any trades in between. During volatile times, gaps do occur in USDJPY.
Reversal - This is when an uptrend turns down or when a downtrend goes back up.
The trend is your friend - A trend will continue until an event disrupts it. This is especially true of USDJPY.
The USDJPY pair goes in the direction of U.S. interest rates but can also go up if the Yen falls in value. You can make money with this pair if you stay abreast of the world economy, the U.S. economy, and the Japanese economy. Be prepared to be wrong–even the best miscalculate–and get out of losing trades in a timely manner. Study, study, study.
This pair has a lot of commentary and guidance out there, so take advantage of experts while watching out for those who only want to sell you something or offer "tricks" to beat the market.
USDJPY tends toward long-term trends. It is just volatile enough to give you some good trading opportunities but not so volatile it will scare you every day.
It is called "Gopher."
There are 280,000 trades on average.
The Yen has not been doing well. It should not be considered safe.
The Yen and gold are negatively correlated. When one of them goes up, the other drops.
Sometimes, but not dramatically. It is known for having moderate spreads.
USD is considered safer.
Buying either currency is risky when the economy is turbulent. Wait and see if a recession develops instead of guessing. See what the market does; don't guess what it might do.
The pair may be in an uptrend for a while. The risk is a bit higher than usual, but if you see a sustained trend, you may want to buy in.