Renowned for its high volatility, trading GBP/JPY demands specific strategies. In this article, we will examine four trading tips for the "Widow-maker."
The GBP/JPY is known by several nicknames in the forex market, including Geppy, Guppy, Gopher, The Dragon, and Widow-maker. These nicknames reflect the challenging nature of achieving success in trading this pair.
This is primarily due to the high level of volatility in the price movements of GBP/JPY. To overcome this pair, traders need to exercise extra caution and precision. Unsurprisingly, special strategies are necessary to attain exceptional results when trading GBP/JPY. What are these strategies? There are seven tips you can try.
- Use small lots: Reduce risk by taking smaller positions
- Use proper risk management: Calculate your risk rewards ratio
- Pay attention to economic data: It highly affects both currencies
- Monitor S&R level: Get informed trading decisions
- Reduce stop loss: Raise your TP level instead
- Carry trade: Continuously buy each time the price is pulling back
- Try Naked Trading: Observe candlestick patterns instead
Characteristics of the GBP/JPY in the Forex Market
Looking at the fundamentals, the UK and Japan, the two countries in the pair, are not close trading partners. Nevertheless, as the West's financial center and the East's financial powerhouse, financial institutions frequently transfer payments during European and Asian trading sessions.
Technically, the GBP/JPY pair is characterized by extreme volatility. Its daily movements average 150-200 pips, significantly higher than popular forex pairs such as EUR/USD, USD/JPY, or GBP/USD, which usually move within a range of 50-100 pips per day.
In an international forex forum, a discussion thread once advised beginners to avoid trading the GBP/JPY forex pair. Experienced traders know how challenging this pair can be.
The Widow-maker moves incredibly fast, and losses are likely without a solid risk management plan or a tight stop-loss order. However, extreme volatility does not mean that profits are impossible. The "high risk, high return" principle applies to this pair.
Even if you have a reliable trading system and risk management strategy for other pairs, the GBP/JPY's volatility can easily disrupt your system. Losses can occur due to sharp movements during short-term consolidation periods rather than during trending periods. Even during consolidation, support and resistance levels can easily be breached. Most oscillator-type indicators are also too lagging when applied to the GBP/JPY pair.
7 Tips for Successful GBP/JPY Trading
Trading with the GBP/JPY pair can be challenging, but it's not impossible. As long as you follow the "High Risk, High Return principle," you can make significant profits despite the high risk involved. For beginners, here are four tips for trading GBP/JPY.
1. Use Small Lots
Using the smallest lot size on your trading account is crucial when dealing with highly volatile forex pairs. Your lot size for GBP/JPY should be smaller than the lot size you use for other pairs. It's essential to remember that even if you're confident in predicting the price movement direction, the GBP/JPY can still move significantly in the opposite direction, even if the price moves as predicted.
2. Use Proper Risk Management
Proper risk management is crucial in trading the GBP/JPY, which involves setting stop-loss orders, calculating your risk-to-reward ratio, and implementing position sizing to manage your risk effectively.
3. Pay Attention to Economic Data
Since the UK and Japan both have important financial sectors, economic data announcements can significantly affect the price movements of the GBP/JPY pair. Staying informed about the latest economic news and data releases is crucial to make informed trading decisions.
4. Monitor Support and Resistance Levels
Closely monitoring support and resistance levels is paramount in trading GBP/JPY. Since the pair is highly volatile, these levels can be breached swiftly, resulting in sharp price movements. You can make informed trading decisions and avoid unwarranted losses by monitoring these levels closely.
5. Reduce Stop Loss, Raise Take Profit
If you want to succeed in trading GBP/JPY, you shouldn't treat it like other pairs where corrections signal a reversal. It's common for significant corrections in GBP/JPY to be meaningless and merely consolidate for days before continuing in the original direction.
Therefore, stop loss and take profit are critical in trading GBP/JPY. Set a loose stop loss of tens to hundreds of pips, depending on the timeframe you use when trading GBP/JPY. Never set a stop loss of only a few pips. Instead, set take profit two or three times larger than your target for other forex pairs.
6. Apply Carry Trade
Have you heard about the carry trade trading? It is a trading technique focusing on the positive interest rate differential between the bought and the sold currency. Japan has a negative interest rate due to its stagnant economy, whereas the UK's interest rate has gradually increased since May last year.
During an uptrend, if the UK continues to raise its interest rate while Japan remains in a negative interest rate position, this could present an attractive buying opportunity. You can continuously buy each time the price is pulling back. There is no need for a stop loss, but set the take profit as high as possible as long as the long-term trend has not reversed. Here is an example of how a carry trade works
If the current interest rate for the GBP is 3.25% per year and the Japanese yen is 0.1% per year, then by buying GBP/JPY a carry trader will obtain profits from:
- By buying GBP, the trader earns an interest rate of 3.25%.
- At the same time, by selling JPY, the trader pays an interest rate of 0.1%.
Assuming the exchange rate between GBP and JPY remains relatively stable, a carry trader can expect to profit by 3.15% within a year by capitalizing on the interest rate difference between the two currencies. If the trader opts for a standard lot or a contract size of GBP 100,000, they will earn an annual interest rate of 3.15%. However, if they choose to leverage their trades at a ratio of 200:1 and utilize a margin of GBP 500, they stand to gain GBP 3,150 from the interest rate differential.
7. Try Trading Without Indicators
Trading without indicators means you don't rely on any indicators to trade GBP/JPY. Some people are not accustomed to it, but others can master it. If you are accustomed to it, believe that trading GBP/JPY will feel similar to other forex pairs.
With this trading approach, you can utilize other methods as analytical tools. For instance, you can observe candlestick patterns, apply Fibonacci retracement, or search for breakouts using Ichimoku, which is believed to be profitable for forex pairs involving JPY.
Aside from the Japanese Yen, the Pound is also popular to be traded with the US Dollar. What are the characteristics of GBP/USD, and what are the best tips to trade this popular pair?