The AUDJPY has its own special characteristics
Each currency pair has a personality all its own. Getting to know a pair takes time. You need to spend quality time with it and observe it in real life conditions. Not unlike getting to know a new girlfriend.
In this post, I'm going to introduce you to a not-so-common way to maximize your profit from a well known characteristic of the AUDJPY. But don't take my word for it, always test it for yourself.
What the AUDJPY really wants to do…and why
The AUDJPY is the best pair for the carry trade because the interest rate difference between the two countries is the greatest, among the major currencies. It is called the carry trade because you hold it or carry it for as long as possible to make money on the interest.
At the time this post was written, Australia has an interest rate of 3.25%. At the other end of the spectrum, Japan has a current rate of 0.10%.
If you don't know this already, this is the central bank interest rate, or the rate that the countries central (government) banks lend money to commercial banks. When you are trading forex, this means that if you buy (or are long) a currency, you get paid that countries interest rate. Then of course, if you sell (or are short) a currency, you pay the going rate.
The bottom line is that the difference between what you pay and what you are paid gets added or subtracted from your account every trading day. Since a lot of traders want to take advantage of the interest that they get by just buying and holding the currency pair, there is more of a bias to the long side. That means you are buying Australian Dollars and simultaneously selling Japanese Yen.
Therfore, the currency has a strong long (upward) bias. Most traders know this, but they still trade the AUDJPY just like any other currency pair.
How this can help you
Take any trading system that you have been testing or trading. Backtest it on the AUDJPY, but only take the long trades on the first round. Then on the second round, only trade the short signals. Finally, do a third round with both long and short signals.
I did this with a couple of different strategies that I'm testing and the long trades did much better. More details to come. This may not be the case with every trading method, but it is definitely worth testing.
Such a simple concept, but it can make a huge difference in your results.
Can it be the only currency pair that you trade?
I personally believe that almost anything is possible when it comes to trading (except doubling your money every month with a trading robot). If you work hard/smart enough, you can learn how to trade just one pair, or trade 25 pairs.
Chris Lori believes that the AUDJPY can be the only pair you need. It is his favorite currency pair and so much so, that he has created an entire course around it.
I purchased his course that is where I got the idea to test only long trades. That is only part of the story however. There are actually several characteristics that make this pair unique and a great candidate to be your sole trading pair.
The course comes with 3 physical DVDs in the mail. That is just an introduction to the course and some basic concepts however, the rest of the material is available online. The members only website has 18 more instructional videos plus 14 more market updates that Chris sends out from time to time.
Number 14 was actually uploaded yesterday. Just like the rest of Chris' material, this is an excellent course.
He really goes into what makes this pair tick and teaches you everything he knows about bank reports, key price levels and time of day patterns.
If you are looking to trade an additional currency pair or looking to simplify your life and only trade one pair, I would highly recommend this course. To find out more about Chris, check out my interview…here.
Full disclosure: I did get a discount on this course through my affiliate relationship with Chris and I do get a commission if you purchase through my links. However, the money does go towards the down payment on my Porsche GT3 or my website hosting fees…whichever pops up first. Oh yeah and I donate part of the money to my charity partner.
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Photos: elder_matias, OiMax
I was wondering if you are still following the ideas from the AUD/JPY course? If so how are things progressing, if not then is there a reason you did not continue?
Hi, Hugh!
Congratulations on your site. I find your interviews really interesting. Keep them coming!
What did you learn from Chris Lori’s aud/jpy course that you are applying to your trading? Are you actively trading this pair since you bought it? I heard he uses a price action model for short term trading this pair. Did you find it useful?
Thanks!
Miguel
Hi Miguel,
Thanks! I learned several things from the course, but the main thing was to only trade long. I’m still testing some ideas, but it might be some time before I can develop something solid. Here are the results from my testing:
http://www.tradingheroes.com/a-super-simple-system-tested-audjpy-daily-pin-bars/
Yes, he primarily uses price action with some time-of-day and fundamental analysis. I found it very helpful.
Hope you are trading well…
Hugh
This daily audjpy system of yours looks promising. Please keep us abreast of any developments.
I can understand he advocates to trade only long in his long-term model due to positive carry, but what about daytrading? Does he suggest to do so even in smaller timeframes, like the 5M chart?
Thanks
Miguel
Yes, on all timeframes.
I’m still learning the ropes of forex. Haven’t even made my first trade yet, but I have a question. For AUD/JPY, say the interest rate differential leaves a positive rate of 3.15%. Does that mean you make 3.15% on your balance every day? Every Week? Every month? Every year?
Hi Jake,
The interest rate differential of 3.15% is just the difference in interest rates between the two countries. What you actually make on a trade will depend on your broker, so you have to check with them to find out exactly what you will pay/receive and when it accrues.
The best way to get a feel for it is to sign up for a demo account with a broker that you think you want to trade live with in the future. That way you won’t risk any money and you can see rollover interest in action.
Hope that helps!
Happy Trading,
Hugh
Hey,
Thanks for the reply! I just wanted to make sure that a long trade on AUD/JPY wouldn’t yield profits only a bit better than a savings account (excluding those earned from the rise in currency value. Just talking about those from interest rates).
Thanks for the tip. I actually have a demo account at Oanda with Metatrader as well as a demo copy of Forex Tester. Unfortunately, I’m at the point where I’m learning more how to use the platforms than learning actual forex , but I’ll definitely try a carry trade now. I’m also on my second round of the ‘School of Pipsology’ so I figure at least I’m not going backwards in knowledge. Peace!
Cool man…let me know how it goes!
Ok, it’s a little late, but after reviewing the School of Pipsology a second time, I realized there was something I completely forgot about concerning carry trades (or forex in general). LEVERAGE! You earn interest on the size of the money you’re controlling, and not just the amount you put up. Knowing this makes half of my original question irrelevant, as now it’s obvious a trader utilizing a carry trade with leverage has the potential to make more in interest than he could with a savings account.
Never too late 🙂
Yup, the leverage does increase your carry. You just have to keep a close eye on market risk, which makes it much riskier than a savings account.
Try the carry trade in a demo account, so see how it works with the amount of money you will be trading. Sometimes the carry is not worth going for, especially on smaller accounts. Like stepping over the dollars to get to the pennies.
It all comes down to your plan…I think there has to be a combination of capturing pips as well as percents.
Thanks for sharing Jake!
Hugh
I agreed. Even in losing this pair add cents or dollars and gave you an advantage. With China and gold undervalue and being spur growth. Expect this pair to rise if not correction.
I wonder why does Yen gain strength every end of the month.
Do you know?
Regards
David
Not too sure David, worth looking into!