What To Know When Trading GBP/JPY

What To Know When Trading GBP/JPY

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Known informally among forex traders as “Geppy” and “The Beast,” the GBP/JPY pairing is viewed as a reliable indicator of global economic health. These individual currencies provide a strong reflection of economic health and policymaking in both the Asia-Pacific region as well as Western Europe.

But this reliance on GBP/JPY as an economic indicator shouldn’t mislead traders into treating it as a safe pairing for beginners to get their feet wet with. Though the pairing’s volatility is great for generating potential earnings, it also creates significant risk for forex traders. This is why “Geppy” has one of the most fearsome reputations among all forex pairs.

Profit-earning trading is possible, but traders should approach “The Beast” with caution and familiarize themselves with the complexities of this forex offering.

Why Traders Love GBP/JPY

The GBP/JPY pairing is popular among traders for a few different reasons. By far the biggest reason, though, is its historical volatility, which creates significant price swings that traders can use to capture profits on an open position—and in many cases, within a relatively short time frame.

The combination of a high-yielding currency pair, in the case of GBP, with the relatively low-yield JPY, also creates a dissonance that can be used to execute a carry trade. In this strategy, traders borrow funds from a low-yield currency to purchase a higher-yield currency, which can then yield profits simply by moving money around and leveraging yield differences. GBP/JPY is a perfect currency pairing for any trader attempting this strategy.

The broad ranges for price action, as well as the swift price movements taking place within this currency pair, are among the reasons why this pairing is called “The Beast.” Although its profit potential can be big, the risk for losses must be accounted for.

Advantages of Trading “The Beast”

As mentioned above, the volatility generated by GBP/JPY creates a natural, and recurring, opportunity for trading profits. Both of these currencies are high volume and heavily influenced by economic news reports coming from both countries, which can benefit any trader who values event-based data points in their trading strategy.

GBP/JPY suits a wide range of trading approaches, including not only long and short positions but also the carry trade strategy and contract-for-difference (CFD) trading.

The pairing is also ideal for traders who like pairings that combine large, stable currencies with smaller, more active currencies. In this case, GBP provides the larger, more stable side of the pairing, which then combines with JPY to create more movement and data variability as traders try to forecast lucrative trading opportunities.

Dangers of Trading “The Beast”

As an economic linchpin connecting major economies from different global regions, GBP/JPY is subject to extreme volatility that is often difficult to predict or track through traditional triggers or indicators.

Beginning traders are almost always discouraged from initiating trades with GBP/JPY due to this significant risk. Sophisticated trade evaluation techniques are required to make an educated guess on the pair’s price movement, and only time and practice can give traders the skills they need to analyze these possibilities with any remote sense of accuracy. Even experienced traders struggle to develop a reliable method for evaluating indicators and timing trades, in large part because the traditional triggers that have proved to be successful with other currency pairs can’t be easily applied to GBP/JPY.

The risks are even greater with CFD trading, where a leveraged position can quickly lead to enormous losses in excess of your account balance—especially if you’re using a brokerage that doesn’t offer negative balance protection. Most traders know that CFD trading is something to approach with caution for any forex pairing, and GBP/JPY only amplifies those dangers.

The same is true for carry trade strategies. While a carry trade doesn’t bear the same risk profile as CFD trading, a carry trade can still leave you exposed to economic events and unforeseen trends that undercut your strategy and hit your trading account with steep losses.

Which GBP/JPY Trade Indicators to Keep an Eye On

The Impact of Energy Commodities

Traditional triggers for forex price movements—such as economic reports, policy proclamations from both the Bank of England and the Bank of Japan, and political news—can all affect the value of GBP/JPY. But the potential price implications of this news can be tough to evaluate because these triggers don’t affect GBP/JPY in quite the same way that they would for other pairings.

One of the more reliable price influences is the role of energy commodities for both Great Britain and Japan. While Great Britain is a major exporter of crude oil around the world, Japan is one of the biggest importers for that product, and it’s the second-largest importer of natural gas. JPY tends to move up or down in conjunction with shifts in the price of global energy.

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When crude oil or natural gas prices plummet, as happened in late 2014, it can trigger a downgrade in GBP’s value while providing an economic boost to JPY. When both movements happen in concert with each other, swift, dramatic GBP/JPY price fluctuations can occur.

Interest Rates

The U.K. has historically had high interest rates, and Japan has had zero or negative rates for the last couple of decades. This has made the carry trade—or being long GBP and short JPY holding positions overnight to receive positive swap interest—very popular. This can be a successful strategy, but any short-term volatility can easily wipe out the positions held. The last time this happened was January 2019.

Other Technical Indicators 

Economic events and reports are particularly useful when trading GBP/JPY, in part because of JPY’s tendency to be influenced by economic events coming out of Japan. But other technical indicators can and should be incorporated into your trading strategy.

Popular indicators to use with GBP/JPY include:

  • Stochastic oscillator: Because of the volatility of “The Beast,” price swings often move into overbought or oversold territory. Stochastic oscillator can help you identify these conditions and open a position with the expectation that prices will soon move in the other direction.
  • Moving averages: By charting two separate moving averages on the GBP/JPY chart, you can identify trading opportunities based on crossovers between these two lines. Depending on your trading timeline, a common approach to moving averages is to chart the 21-day exponential moving average (EMA) and the 50-day EMA on the GBP/JPY chart. Typically, long positions are more likely when the 21-day line is above the 50-day. By contrast, short positions may be considered when the 50-day is above the 21-day EMA.
  • Moving average convergence-divergence (MACD): Even a beginning trader can understand that Geppy’s price is likely to fluctuate and perform numerous reversals over time. But how can you determine the longevity of any price swing? That’s where MACD comes in handy: It can help you evaluate and predict price momentum so that you don’t bail early on a position where the value—and profits—are expected to sustain a long climb. On the other hand, it can also help you identify the right time to exit a position before that momentum turns the other direction.

When to Time Your Trade

Because of the time difference between Japan and Great Britain, economic reports and other market-affecting news typically have no overlap between the two countries. There is, however, a three-hour window of overlap between the Asian and European markets, running from 5 a.m. to 8 a.m. GMT, which historically features the greatest amount of liquidity for JPY.

Key economic releases in Japan can also take place between 9:30 p.m. and 3 a.m. GMT. Traders should keep an eye on news developing at this time to get the jump on possible price movements before European traders wake up and try to join the action. Some experts also recommend watching specific times during the day when official news in Japan tends to get released, including 6:30 p.m. and 3 a.m. GMT.

Get Your Game Plan Ready

GBP/JPY is one of the highest risk/reward propositions on the forex market. Although traders will likely be drawn to the earnings potential, they should also wait to engage this pair until they’ve gained experience in evaluating charts and indicators and are confident in their ability to analyze GBP/JPY and execute a trading strategy.

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Joe Doe in London, England purchased a

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