EURJPY Trading Strategy (Backtest And Example)
Last Updated on April 18, 2023
The euro (EUR) and yen (JPY) are the most traded currencies after the USD. Like the USD, the euro and yen are also held as reserve currencies by different countries. But what is EURJPY in trading? Is it possible to find a EURJPY trading strategy?
Yes, it’s possible to make a EURJPY trading strategy, but forex is very difficult to trade – much more complicated than stocks.
EURJPY is a minor currency pair that compares the value of the euro to that of the Japanese yen. In this currency pair, the EUR is the base currency, while the JPY is the quote or counter currency. So, the EURJPY trading strategy is the act of exchanging JPY for EUR or exchanging EUR for JPY.
In this post, we take a look at EURJPY currency trading. At the end of the article, we present a backtested EURJPY trading strategy.
What is EURJPY?
The EURJPY simply refers to the forex quote for the euro against the Japanese yen exchange rate. That is, it compares the value of the euro to that of the Japanese yen. In forex trading, EURJPY is a minor currency pair. In this currency pair, the EUR is the base currency, while the JPY is the quote or counter currency.
EURJPY is considered a minor pair because it is formed by cross-pairing EURUSD with USDJPY. In forex trading, currency pairs are categorized according to their liquidity and trading volume — if there’s a lot of activity in the market, it’s classed as a major pair, and if there’s less activity, it’s regarded as a minor pair. Since USD is the most traded currency in the world, currency pairs of the major economies against USD are regarded as ‘major’, while a cross pair of major currency pairs are regarded as minor.
A cross pair is a net currency pair position formed by trading two currency pairs with one common currency (often the USD). EURJPY is a cross pair of EURUSD and USDJPY. So, a net long EURJPY position (selling JPY to buy EUR) is achieved by going long on USDJPY and EURUSD simultaneously — selling JPY to buy USD and using the USD to buy EUR. On the flip side, a net short EURJPY position (selling EUR to buy JPY) is achieved by simultaneously shorting EURUSD and USDJPY — selling EUR to buy USD and using the USD to buy JPY.
In essence, trading the EURJPY currency pair is the act of exchanging one currency for another, with the USD as the medium for the exchange. Traders are able to profit from such exchange when the value of the currency they exchanged rises relative to the other.
Is EURJPY good to trade?
Yes, EURJPY is good for trading. Although the currency pair is not one of the major pairs, there are many reasons we think it is good for trading. These are just four of them:
- The constituent currencies are very popular: Both the Euro and the Japanese Yen are ranked amount the top eight currencies in the world. In fact, they are the most traded currencies after the USD. Just like the USD, the euro and yen are also held as reserve currencies by different countries. This makes the euro and yen cross pair the most liquid outside of the U.S. dollar-based “majors.”
- Volatility: The EURJPY pair often shows high levels of volatility, as the price swings significantly in different directions. This provides opportunities for traders to profit from steep price swings.
- Relative predictability: The currency markets are well-known for misleading signals, but the direction of the EURJPY is often more predictable. As a result, EURJPY may be easier to trade than other forex pairs. However, we emphasize that you need to backtest before you do commit money and capital.
- Competitive spreads: Even compared to many of the major currency pairs, EURJPY tends to have competitive spreads. This can affect profitability. Slippage could be a major factor in trading, depending on trading style and strategy.
EURJPY and USDJPY correlation
In forex trading, correlation is a statistical measure of how closely two currency pairs move — the greater the correlation coefficient, the more closely aligned they are. A positive correlation means that the values of two variables move in the same direction, while a negative correlation means they move in opposite directions.
The price movements of EURJPY and USDJPY are often significantly correlated. Sometimes, the correlation coefficient gets up to or even more than +90% (+0.9). At such times, opening a position in both currency pairs may come with a lot of risks as it would almost be equivalent to carrying a double position in any one of the two pairs. Whatever affects one is 90% likely to affect the other.
Correlation is a topic we have covered in multiple articles before. Put shortly, correlation is important because you want to avoid trading strategies that have profits or losses at the same time. You want to “distribute” the profits and losses evenly – not in clusters. Our experience is that this is perhaps the most important factor in trading, yet very few traders spend much time including or excluding strategies based on correlation. Even a “mediocre” strategy might be a much better choice than a seemingly more profitable one.
We recommend having a look at our articles about correlation and how you can build a portfolio of trading strategies:
- Correlation trading strategy
- Uncorrelated assets and strategies
- Does your trading strategy complement your portfolio of strategies?
- Portfolio trading strategies
Best time to trade EURJPY?
For day traders, the best time to trade EURJPY is during the Asian session and the European session. During the Asian session, 23:00 to 06: 00 GMT, the Japanese market is open, which drives trading in the currency pair.
Similarly, during the European session, 07:00 to 15:00 GMT, the European markets are open and drive trading in the currency pair.
How likely are you to succeed in trading EURJPY?
We have backtested plenty of forex trading ideas, but forex has two issues:
- The window of opportunity is small. Competition is fierce.
- Very few strategies that look promising in a backtest pass an out of sample backtest.
Thus, we tend to recommend staying away from forex trading. We regard forex and currencies as the hardest asset to trade. Your chances of succeeding as a forex trader are pretty low, in our opinion. Also, we suspect very few forex traders have any idea whatsoever if their trading strategy has a positive expected return.
First of all, the forex market is a zero-sum market. This is in contrast to the stock market, where you get an added tailwind from the overnight trading edge.
Another main reason why forex is so damn difficult to trade is the zillion reasons that make the forex rates move. Additionally, you face scam risk (lots of unregulated brokers).
All these risks apply to any forex pair – also the EURJPY. We have written a separate article where we list the 12 reasons why you should avoid forex trading.
Please also read our other articles about the probabilities of making it as a trader:
- What percent of day traders make money?
- Failed traders do this (inverse thinking)
- What percentage of traders lose money
A major step if you want to succeed is this: you need to backtest and you need to treat trading like a job – like a profession (even if you do it on the side). You are competing against players that are both more knowledgeable and better capitalized than you are!
EURJPY trading strategy backtest – does it work?
If you manage to find a forex strategy that works, it might offer a tremendous advantage, though: the strategy most likely offers good diversification from your other trading strategies, especially if you are trading stocks or stock market indices.
However, EURJPY is one of those currency pairs that behave a little like stocks. This might make it easier to find profitable strategies, but then again, it might then be less likely it offers any true diversification from your stock strategies.
Despite all the negative comments about forex we made in this article, we do trade a couple of forex strategies ourselves, but we stick to forex futures.
At least a couple of our strategies from our monthly trading edges archive work on the EURJPY pair. Let’s look at them:
EURJPY trading strategy backtest no 1
Below is an Amibroker backtest taken from the archive (monthly trading edge May 2021 – strategy number 7 on our single strategies and bundles page) and backtested on forex data (not futures):
There are 198 trades, the average gain per trade is 0.64%, the win ratio is 75%, the max drawdown is 14%, and the profit factor is 3.1.
- What is an acceptable max drawdown in forex?
- How to calculate win rate in trading
- Profit factor calculator
- Equity curve trading
The strategy has worked pretty well over the last decade!
EURJPY trading strategy backtest no 2
Our monthly trading edge for August 2021 works pretty well on the EURJPY pair (and many other pairs as well). The edge is strategy no one is on our strategy page. We modified the parameters slightly and we got the following equity curve:
The strategy has 138 trades, the average gain per trade is 0.4%, the win rate is 71%, max drawdown is 19%, and the profit factor is 2.
The trading statistics and performance metrics are not fantastic, but if it can offer diversification from your other strategies it might be an excellent idea to trade it.
List of trading strategies
We have written over 800 articles on this blog since we started in 2012. Many articles contain specific trading rules that can be backtested for profitability and performance metrics.
The trading rules are compiled into a package where you can purchase all of them (recommended) or just a few of your choice. We have hundreds of trading ideas in the compilation.
The strategies are taken from our list of best trading systems. The strategies are an excellent resource to help you get some trading ideas.
The strategies also come with logic in plain English (plain English is for Python traders).
For a list of the strategies we have made please click on the green banner:
These strategies must not be misunderstood for the premium strategies that we charge a fee for:
FAQ EURJPY trading
We end the article with a quick FAQ:
Q. How do you trade EURJPY?
A. As you might understand by now if you have read thus far, we believe there is only one holy grail in trading: backtesting and trading many strategies. First, you need to have a backtested strategy with a positive expectancy. Second, you need to find out how you can trade it together with your other strategies.
Q. What time can you trade the EURJPY?
A. There is no “worst” or “best” in trading, and not in EURJPY either. You need to backtest. If it works, it works. A backtest is the best indication you have.
Q. Is EURJPY a good pair to trade?
A. Yes, if it adds value to your portfolio of strategies! Again, only a backtest can help you find out.
Q. Is EURJPY good for beginners?
A. Forex is not the right place to start trading. We recommend stocks and the stock market, which we believe offer the best possibility of making money.
Q. What factors affect EURJPY?
A. Who knows. There are a zillion reasons why the market moves, and the forex market has a ton of news every day. Furthermore, players might have different reasons to buy and sell forex. We can safely be sure that the number of factors is almost unlimited.
Q. How many pips does EURJPY move daily?
A. A quick backtest shows that the average pips so far in 2022 have been around 95.