Tuesday, March 20, 2007

Trading GBP/JPY

Such a great moving pair. If nothing is moving, GBP/JPY is.

But be careful what you ask for, unless you know what you trade, when you trade GBP/JPY.

Actuall I would recommend you shouldn't trade GBP/JPY unless you have followed it for at least a month on the charts in realtime. It’s a great mover, no doubt, but you need to know the mechanics behind this pair or you will get crushed.

GBP/JPY is called a cross currency pair for a reason. The major pairs behind it are GBP/USD and USD/JPY. And if you are a big player and want to go long GBP/JPY in real size you usually trade it through the majors.

Meaning you go Long GBP/USD and you go Long USD/JPY

Now let’s say you do that at

Long GBP/USD at 1.9450


Long USD/JPY at 117.50

For a Long GBP/JPY at 1.9450*117.50 = 228.54

We all know GBP/USD is quite volatile so let’s say it goes up 15 ticks to 1.9465, USD/JPY is still at 117.50

GBP/USD went our way, so GBP/JPY should be up as well. Let’s do the math:

1.9465*117.50 = 228.71 or a 17 tick profit.

Not a lot but better than the 15 ticks the GBP/USD made.

Let’s say, you took the trade, because you saw resistance in GBP/JPY at 228.50 breaking on a short term chart. Unfortunately neither of the majors broke their resistance, they stopped at the round number 1.9450 and 117.50 respectively and reversed 20 ticks in the blink of an eye.

It happens as we all know and to tell the truth, 20 ticks on GBP/USD is nothing uncommon for a wiggle and a retest of the round number. I myself held a few -20 on GBP/USD without the urge to stop it out right away, as I know it will make it back in a few ticks, the moment volume comes in.

So positions in both majors are down -20

But for our GBP/JPY that means 1.9430*117.30 = 227.91 or down 63 ticks

I don’t know how you see it, but having 2 positions down 20 is nothing I like, but depending on the timeframe I trade it might be acceptable.

One position down 63 ticks, well that’s something different altogether. Still if you look at the majors, it might be that your trade setup is still valid and in the next 5 minutes GBP/JPY will reverse all the 63 ticks back up for a test of the round number and continue upwards.

The spike on that 15min chart above did not reach 227.91 today, the spike was down to 228.15 only, still if you were long it was sure nasty. But in the majors, it was just a wiggle prior to another leg up.


So make sure you know what you trade when you trade GBP/JPY. And always have the GBP/USD and USD/JPY charts side by side with GBP/JPY.

Sunday, March 04, 2007

Recommended Reading

The book I'm recommending here is called the Market Profile Handbook. The CBOT, which is devoting a section of their homepage to Market Profile lists it as one of the resources to understand Market Profile.

Market Profile are these cryptical ABCDF charts you always asked yourself, what is that all about, if you ever had a look at them. As you might have noticed a few months ago I started using Price Histograms, which is Ensigns way of implementing Market Profile, on my charts as well. Take a look at Enthios, if you are interested in other ways of using Market Profile or in templates for your favorite chart program.

You'r not interested in Market Profile, because you don't understand these charts and you don't want to confuse yourself. If you consider yourself no novice in trading, take a look at the Market Profile Handbook nonetheless. You will find a lot of information in it about the reasons behind price movements and how prices usually moves, which makes the read worthwhile. And this will help you read your favorite charts and indicators with better understanding.

I forgot to mention, the book is free of charge, so do yourself a favor and get yourself your copy and read it.