GBP/JPY Trading Tutorial

This currency pair is a popular choice for many reasons. Mainly because it’s a highly liquid pair, so you know there will always be a buyer and a seller. This is often beneficial as it makes your trade much more stable.

The pairing has quite a unique structure to other pairs in the forex market because it tends to trade within a range rather than trending or ranging. Because of this, we can take advantage of volatility by using techniques such as breakout trading and range trading.

The level that the currency tends to move towards is known as support and resistance. Which we will look at later on in this article.

What is GBP/JPY?

The GBP/JPY pair represents the British pound (GBP) vs the Japanese yen (JPY). For this reason, it is also referred to as ‘Cable’.

(A reference to an old transatlantic telegraph cable which ran from London to Tokyo.)

Now that you know the basics, let’s get started with our tutorial!

We will firstly look at how we can interpret price action for GBP/JPY before moving on to the various strategies we can use.

Interpreting Price Action For GBP/JPY

When trading with the GBP/JPY pairing, one of the first things you should be doing is analyzing to see where resistance and support lies. This will provide you with strong areas which are likely to result in a breakout once these levels have been touched.

You can do this by looking at previous candles or using pivot points. These are known as key levels. So if your trade reaches one of these points, it’s often worth considering closing out your position.

Crossovers are also used by many traders to help them make decisions on whether to buy or sell. An example of this would be looking at moving averages. Which we’ll go into shortly!

Now let’s take a look at different types of trades you can make with the GBP/JPY pairing.

Long Trades 

Going long on the GBP/JPY pairing means that you believe the price will go up. And so, to profit from this, you would buy. The basic idea behind a long trade is that if the market moves in your favor, then you can hope it will continue to move upwards.

Looking at previous candles and key levels, one great way to get an idea of whether or not there may be room for movement is by looking at moving averages. This involves plotting a line on your chart which represents the average price of a currency pair over a set period.

If this moving average is going up, then there’s a chance that we will see some upwards movement in the price too. Since markets tend to be driven by momentum.

When plotting moving averages, you need to decide on what type of shift you’re looking for and how many steps to take along the line. You can also shift it from left to right as well as down and up!

By shifting the lines across your chart, you can often get a better insight into whether or not there will be room for movement. Because key support/resistance levels are now closer together. If they shift downwards though, then there might be a chance that we will see a breakout in the opposite direction.

Similarly, we can also use moving average crossovers to help us with our trading decisions. An example of this is if we had two averages and they crossed each other.

When this happens, it often provides a good opportunity to trade. Because you’ve got an area where bulls (the buyers) and bears (the sellers) are likely to meet.

As these lines represent the average price over a set period, this means they’re unlikely to be dramatically off from what is happening right now! So if they’re crossing over and showing signs of resistance. Then there’s a chance that we will see some downwards movement in the market.

Short Trades 

This means that you’re going to sell GBP/JPY and then buy it back at a lower price. To complete this, you would have to borrow funds from your broker for them to lend them to you at a higher rate.

So you could sell the currency pair, wait until the price drops, and then buy it back. There’s no free lunch though. So if the price went up instead of down, then you’d have to pay more when buying it back!

What can we do to make sure our short trades are successful? 

Well, the idea is the same as with long trades. We use key levels.

As there is likely to be less resistance in this situation, it’s often a good idea to aim for the 4-hour charts. The reason for this is that they show fewer fluctuations. And therefore, are likely to provide us with key support/resistance levels that are more accurate.

GBP/JPY Trading Strategies

When you have a good understanding of the fundamentals, you will make better trading decisions. That means that you need to know about different strategies. Here are some common strategies for traders operating in GBP/JPY:

Day Trading

The base currency (the currency on the left of the pair) is shorted, to buy back at a lower price. The trade is kept open until it reaches your exit price.

Day traders aim for quick gains over multiple trades on the same day. Typically aiming for small profits per trade and gathering these small bits together to come out with a decent return. They use technical analysis tools. And pay attention to news releases that could affect the direction of their trades.

Swing Trading

Swings are longer-term than day trading but shorter than investing or position trading. A swing starts when prices break above or below recent resistance or support levels.

And when they appear likely to retest these levels again before continuing in the breakout direction. Swing traders hold onto their trades for a few days to weeks. They always get out when the price goes up or down by a lot. These traders also buy low and sell high, so they base their trades on technical analysis using candlestick charts.

Scalping

Scalping is a way to make many trades in a short amount of time. They trade for different prices and then sell at the best price. It’s a quick way of gaining small profits from frequent price reversals.

Scalpers don’t use any indicators as such, as waves of buying and selling create the movement themselves. Instead, they keep an eye on moving averages and Fibonacci retracement levels. They use the patterns on charts with what is happening with the price of the stock to decide when they want to trade their stocks.

News Trading

News traders are interested in the political and economic sentiment that drive market events. These are often announced hours before they take effect so great timing is required.

For example, many news traders were caught off guard when UK Prime Minister David Cameron made his Brexit announcement. Any event that could have an immediate impact on the economy will affect GBP/JPY prices, whether they are negative or positive.

The major drawback with this kind of trading is that you can never be 100% certain about what’s coming next. Even with access to websites like Google Finance.

The key to profitable trading is understanding each strategy’s goals, risks, and key metrics. This helps you know when to stick to your chosen method, and how to use it better.

Now let’s take a look at some factors which might influence the price of the GBP/JPY pairing.

Interest Rates 

This refers to how much it costs to borrow money from your broker or bank. And will affect how many people want to buy or sell GBP/JPY. Because if there are changes here, then the cost of borrowing money (the interest rate) will be altered accordingly.

If you can’t currently afford to trade GBP/JPY. But you think there might be a chance of movement soon. Then you can wait until you can and make your move at that time!

Commodity Prices

Commodities such as oil, precious metals like gold and silver, and even things like cotton, all affect the price of GBP/JPY. This is because they’re often traded in US dollars.

If something goes up or down in value then this affects how much money someone has to spend. If a trader wants to buy a commodity to produce something with it. Then this will use funds which leaves less available for them to trade with.

Bonds 

Bonds are a way for countries to borrow money from other countries. To trade with them, you typically need to buy US dollars first and then use those funds to invest in bonds. Which will often give you a sum of money back based on how long they were held for.

They can also be sold before this time is up. So if there’s a chance that the price might change, traders may try and sell them beforehand so as not to lose out!

If the GBP/JPY pairing is going through any big changes. Then traders tend to turn their attention towards interest rates because they’re trying to work out whether or not they will go up or down.

Buy Stop Order / Sell Stop Order 

A common question that people ask when trading is whether or not they should use a buy stop order or a sell stop order.

A buy stop order would be used if you wanted to purchase the GBP/JPY pairing. And then place a limit order at a price of your choice in case there was going to be an upward movement.

If this happened then you could get more money than you expected. But of course, it’s just as possible that there might be no movement at all! This is why traders usually put a maximum amount on how much they are willing to lose before they have taken the trade-off.

A sell stop order would work in the same fashion with one exception. Once hit, you will get out of the position.

The key is to remember the difference between using a buy stop order and a sell stop order.

A buy stop would be used to exit a short position. Meaning that if the price went back up, you could get more money than initially expected. On the other hand, with a sell stop, you are trying to limit your losses in case there is any downward movement!

Why is GBP/JPY One Of The Most Traded Currency Pairs? 

GBP/JPY trading accounts for 8% of daily spot trading volume. This high level of activity can be attributed to several factors such as:

GBP/JPY As A Safe Haven Currency 

The British pound and Japanese yen both represent traditional ‘safe havens’ for investors. During times of financial and economic uncertainty. Traders flock to currencies such as the USD and JPY. Which are considered to be more stable than other currencies in the market.

There is an established correlation between the GBP/JPY and USD pairings. As such, many forex traders see trading one pairing as taking care of two positions at once. This makes trading pairs such as these very attractive to professional traders who work with tight budgets or fixed margins.

This pairing is less sensitive to the global risk sentiment fluctuations than other major currency pairs. In other words, movements in GBP/JPY may not be as extreme as those for pairs such as EUR/USD.

Which tend to move more sharply during periods of market uncertainty. 

This is partly because both major currencies represented in this pairing are less widely traded than other majors. And therefore, have a lower overall market impact.

GBP/JPY Technical Analysis 

Technical analysis is an integral part of trading the GBP/JPY pair. It is one of the most popular currency pairs to use with different types of technical indicators. Because it offers good scalping opportunities, high volatility, and potential swing moves.

Traders often use Fibonacci retracement levels. Or support and resistance levels to take advantage of these characteristics. The pairing is also popular for day traders. Because it tends to be less choppy than other major currency pairs. And therefore, offers smoother price action.

The Difference Between The Cash & The Futures

Forex traders who access the interbank market via their dealing desk may notice that there are two versions of the GBP/JPY being offered. Namely ‘cash’ and ‘futures’. 

Some firms offer both cash and futures.

While others only offer one or the other. These two instruments have a few key differences with implications for risk management purposes.

Inflation Risks 

Traders using cash-based accounts will need to be aware of the inflation risks associated with this pairing. As returns may not always meet expectations due to changes in the value of the Japanese yen against the British pound.

Leverage & Margin Requirements

As a general rule, when you trade futures, you need more money than when you trade cash. This is because the stop-loss mechanism for futures transactions is different from that of cash.

This means that traders will need to have more money in the equity in their accounts if they want to use this instrument.

Funding Costs

Trading futures may incur higher funding costs compared with trading cash. Which can have an impact on overall profitability. However, this also depends on your broker’s pricing policy.

So you should discuss this matter with your dealing desk beforehand to find out if there are any specific rules regarding this.

Direct Market Access (DMA)

Traders who use a dealing desk have access to tools that let them see if enough people are trading the same currency. This allows them to calculate if there is enough liquidity in the market. And determine entry and exit points more effectively.

This means that they can take less risk, but still have the opportunity to earn more money. DMA trading is one of the key distinguishing features between dealing desks and other types of execution venues such as ECNs.

So traders may want to consider which type would be more beneficial. Before deciding whether or not to open a dealing desk account.

What Is The Current GBP/JPY Spread? & What’s An Average Spread Across All Major Currency Pairs?

The difference between the ‘bid’ and ‘ask’ prices quoted by your dealing desk is also known as the spread. It is an important consideration when trading any instrument.

The GBP/JPY spread is one of the most liquid in the forex market. So it tends to be narrower compared with other major currency pairs. However, this average figure varies across different venues.

So traders should always check what spreads are being offered at their particular broker. If the market is moving quickly, then spreads may get wider. This can happen because the market is more volatile. Which can work against your favor if you’re holding a position at that time.

How Much Capital Do I Need To Trade GBP/JPY?

The GBP/JPY is a popular instrument among traders because it is one of the most liquid currency pairs. This means that if you want to open an account. For example, with XM.

You will need to fund it at least partially to trade this pairing. Some brokers may offer lower minimum deposits than others. So it’s important to compare different firms before deciding where you want your funds to be held before trading begins.

What Are Some Common Mistakes Novice GBP/JPY Traders Make?

Trading Without Enough Capital 

Trading with high leverage can increase your profits when used correctly. But it can also lead to greater losses if risky trades fail.

It’s important to ensure that you use the minimum degree of leverage allowed for this instrument to reduce your risk exposure.

Not Planning For The Overnight Interest Rate Differential (IR) Charge

If you hold a position overnight and then roll over to another day. Your dealing desk will usually charge an overnight fee. Which is based on the prevailing interest rates in both Japan and the UK.

This can have a significant impact on returns if it isn’t taken into account. Particularly if rates between these two countries differ significantly.

Using Price Feeds From Different Brokers To Find Entry & Exit Points

It is recommended that traders only use data provided by their dealing desks. When making decisions about opening or closing positions. Because using incorrect information may lead to poorer results due to liquidity issues.

This is especially important to consider if you plan on using direct market access tools. Since these rely on feeds from your dealing desk to function effectively.

Becoming Overconfident Following A Series Of Successful Trades

All traders are prone to emotional trading at some point. So it’s important not to let your hubris get the better of you when things are going well.

Making sure that you have proper risk management strategies in place that can help prevent this from happening. Allowing you to remain grounded during periods of success. Which may lead to greater losses if ignored.

Ignoring Entry & Exit Signals

It’s important to use both entry and exit signals when trading this instrument. Without using these, it can be difficult to gauge your success in achieving the desired results.

But because GBP/JPY trades are highly liquid. There are almost always plenty of opportunities available for intraday traders to take advantage of.

This means that you don’t need to pay too much attention to each signal which comes through. If you aren’t concerned with perfectionism. Just making sure that you follow your rules consistently will often be enough.

Not Taking Proper Advantage Of Market Liquidity

Even though GBP/JPY is one of the most traded pairs in the foreign exchange market. Liquidity does vary significantly between different times of day and trading sessions.

Traders should try to find moments when liquidity is at its highest before opening positions. This will ensure that they can get in and out of trades with minimal slippage. Which can lead to greater profits overall.

Managing Risks…

Taking into account the above information. What do you think might happen during an interest rate announcement?

Traders who have sold GBP/JPY will likely try to use their pending orders to exit this trade and recoup some of their losses. This will lead to an increase in the price of GBP/JPY. As there are fewer traders who would like to buy. Which is now tied up with pending sell orders.

At this point, traders may also think about whether or not interest rates will change. Others may try and gain money by taking advantage of any increase in the value of GBP/JPY. After the interest rate announcements.

As you can see, there are many things to take into account when trading pairs such as GBP/JPY. And sometimes these factors might contradict each other too! You could go short on GBP/JPY because you expect it to fall, but then you might go long because you think that it could go up.

The good news is, there are plenty of strategies out there that are designed to make this easier for traders. Some people will use fluctuations in the price of GBP/JPY to execute a big swing trade. Buying lots of units of currency when the price looks like it is going down and vice versa with their sell orders!

Others may just try and hold on until they have made enough profit to get out of the position, which is called being flat. Whichever strategy you choose, it’s important to keep your losses low so that you can maximize your gains!

Takeaway

You may have started trading GBP/JPY using a demo account or even a practice account. Which is fine. Because you can always go back to this if you need to. It might be worth going over some of the information above again. So that you get a better idea of how to trade with GBP/JPY and other currency pairings too!

You could also think about whether or not you want to sign up with a particular broker. Some offer incentives such as free educational material when you first join them. But others might offer better spreads or lower fees. Which could make a big difference to how much profit you make!

You should also think about whether or not you want to trade with a company that has an office in your part of the world. If they do, then you can probably speak to them and get some help and advice whenever you need it.

As always though, we would like to remind everyone that this is general information intended for those who are new to trading. It’s important that each trader researches as much as possible. So they can create their strategies and become more profitable!

Witzeltrading.com

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