Home > Uncategorized > Yen crosses.. Pips for thought..

Yen crosses.. Pips for thought..

Why are JPY pairs so volatile historically?

FX 101. What are the Foreign exchange majors?

The majors are USD, EUR, JPY, CHF and GBP.

As they are traded against the USD, major pairs are therefore the EURUSD, USDJPY, USDCHF and GBPUSD.

That brings us to today’s topic, the major crosses: EURJPY, GBPJPY and even the AUDJPY.

From a simple point of view, cross values are derived from the following formula:

EUR/ USD x USD/ JPY = EUR/ JPY

(A)          x         (B)       =   (C)

(A): Multiplier pair

(B): Base pair

From the above equation, the EUR and GBP crosses will typically be 1.45 times and 1.63 times more volatile than USDJPY, i.e. Assuming USDJPY is constant, 1 pip movement results in 1.45 and 1.63 pip movement in EURJPY and GBPJPY.

Of course in an ideal world the JPY will be constant. In the real world, both are variables and due to trade flows, prices fluctuate constantly.

Fundamentally, to effectively trade the EUR and GBP yen crosses, one could place more emphasis on the USDJPY pair instead of the EURUSD or GBPUSD.

According to the veterans, yen crosses are not as profitable statistically and not for the faint hearted. I agree with that to a large extent in the sense that stop losses have to be greater, risk is higher etc.

With this in mind, one might also infer that round number Support/Resistance levels (i.e. 1.00 and 0.50 price levels) for cross pairs are not as effective (as the USDJPY’s) since the price of the yen cross is a derivative of the USDJPY .

Point forward, to better utilise stop loss and profit target areas, one should consider consulting the USDJPY charts to identify potential reversal/support/resistance points in order to set informed and realistic stop loss and target profit levels.

And yes, going by the above train of thought, that is why the EURGBP is less volatile by nature.

Advertisements
  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: