In conclusion, it is recommended to use GBP/USD not as a new entry signal, but as a “permission filter” to determine whether to buy GBP/JPY or to stand aside.
Waiting for a golden cross on GBP/USD as well often leads to delayed entries, so it is better to first make decisions based primarily on the “position of the closing price relative to the long-term SMA” and the “slope of the long-term SMA.”
Why is it necessary to look at GBP/USD?
Theoretically, GBP/JPY is composed of the following combination.
GBP/JPY = GBP/USD × USD/JPY
In fact, even in foreign exchange educational materials from financial institutions, the cross rate for GBP/JPY is calculated by multiplying GBP/USD and USD/JPY.ANZ Foreign Exchange Educational Materials
Therefore, two forces are involved in the rise of GBP/JPY.
If both rise, GBP/JPY is likely to rise strongly.
On the other hand, if USD/JPY rises but GBP/USD falls significantly, the bullish and bearish factors in GBP/JPY will cancel each other out.
For example,
then GBP/JPY will rise by approximately 0.6%.
However,
then GBP/JPY will fall by approximately 0.2%.
In other words, it is not enough for the USD/JPY Point & Figure to simply reverse to a buy signal; it is meaningful to check GBP/USD to see if the pound is not extremely weak against the dollar.
Chart settings to use
Set all three charts to the 1-hour timeframe.
USD/JPY
GBP/JPY
GBP/USD
Use 1-hour closing prices that all closed at the same time. If you judge based on a candle that is still forming, the state may change by the time it closes, so always judge based on completed candles.
Specific method for judging GBP/USD
At the point when the GBP/JPY golden cross is confirmed, divide GBP/USD into the following three stages.
Grade A: GBP/USD is supporting the buy
This is a state where both of the following two conditions are met.
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The closing price of GBP/USD is above the long-term SMA
-
The current long-term SMA is higher than the long-term SMA from 5 hours ago
Furthermore, if the short-term SMA is also above the long-term SMA, it is classified as an “A+ rating”.
In this state, the pound is also in an upward trend against the dollar, and both the rise in USD/JPY and the rise in GBP/USD are pushing GBP/JPY higher.
This is the most desirable combination for buying GBP/JPY.
B rating: GBP/USD is neutral
This is a state where the conditions are divided as follows.
-
The closing price is above the long-term SMA, but the long-term SMA is still pointing downward
-
The closing price is below the long-term SMA, but the long-term SMA is flat or pointing upward
-
The short-term SMA and long-term SMA are crossing repeatedly
-
There is no sense of direction within the range of the most recent highs and lows
GBP/USD is not a strong tailwind, but it is not enough of a headwind to immediately rule out buying GBP/JPY.
In this case, we will separately verify the method of entering immediately and the method of waiting for an improvement in GBP/USD.
In actual practice, we wait for up to 6 one-hour candles, and
-
the GBP/USD closing price exceeds the long-term SMA
-
GBP/USD breaks above the highs of the last 3 candles on a closing basis
-
the short-term SMA remains above the long-term SMA for GBP/JPY
If these conditions are met, a method of entering late can be considered.
However, if GBP/JPY has risen too much by that point, we will pass on the trade.
Rating C: GBP/USD is strongly opposing a buy
This is a state where both of the following two conditions are met.
-
GBP/USD closing price is below the long-term SMA
-
Current long-term SMA is lower than it was 5 hours ago
Furthermore, if the short-term SMA is also below the long-term SMA and the most recent low has been updated, it is a clear downtrend.
In this state, even if USD/JPY is rising, GBP weakness may suppress the upside of GBP/JPY. Even if a golden cross appears in GBP/JPY, basically refrain from buying.
Rules for completing a GBP/JPY buy
Summarizing the actual flow into a single rule, it is as follows.
Stage 1: Confirmation of USD/JPY reversal
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USD/JPY 1-hour Point & Figure reverses to buy
-
Subsequently, the 4-hour Point & Figure also reverses to buy
-
Both are judged by the confirmed closing price
The 1-hour reversal is treated as an early warning, and the 4-hour reversal is treated as confirmation of a full-scale shift toward yen depreciation.
Stage 2: GBP/JPY entry signal
-
While both USD/JPY P&F are in a buy, the GBP/JPY short-term SMA makes a golden cross with the long-term SMA
-
Cross is confirmed at the 1-hour closing price
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In principle, target the first golden cross that occurs after the 4-hour reversal
Stage 3: Final judgment using GBP/USD
Check GBP/USD at the same time the golden cross is confirmed.
GBP/USD status judgment A+: Closing price above long-term SMA, long-term SMA upward, short-term SMA also above, top buy candidate A: Closing price above long-term SMA, long-term SMA upward, normal buy candidate B: Conditions mixed with no sense of direction, wait or use small lots for verification C: Closing price below long-term SMA, long-term SMA downward, basically refrain
Step 4: Confirming if GBP/JPY is overextended
Even if all conditions are met, do not chase the trade if GBP/JPY has already surged.
As a provisional rule,
if GBP/JPY closing price – short-term SMA > 0.5 times ATR14, GBP/JPY closing price – short-term SMA > 0.5 times ATR14
then wait and look for the first pullback.
Since 0.5 ATR is a tentative value, compare 0.3 ATR, 0.5 ATR, and 0.8 ATR through backtesting.
After a pullback is formed,
-
rebound near the short-term SMA
-
break above the recent small swing high on a closing price basis
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GBP/USD maintains A or A+
-
USD/JPY P&F maintains a buy signal
if these conditions are met, you can enter from the pullback.
Handling Lot Sizes
It is best to avoid changing lot sizes significantly based on the state of GBP/USD before verification.
Initially, it is realistic to classify them as follows:
Condition Provisional Response GBP/USD A+/A Normal Risk GBP/USD B Verify with 0.1 lots on JFX, or half the normal amount GBP/USD C Wait
However, you must verify with actual data whether the performance of A-rated trades is truly better than B-rated ones. It is safer to start by trading all positions at 0.1 lots (1,000 units) and marking them as A, B, or C in your trading journal.
Once you have accumulated a sufficient number of trades,
-
average profit of A+
-
average profit of A
-
Average profit of B
-
Profit factor when excluding C
-
Maximum consecutive losses for each judgment
-
Maximum drawdown for each judgment
are compared.
Reverse everything for sell positions
When selling GBP/JPY, the process is as follows:
-
USD/JPY 1-hour and 4-hour P&F both reverse to sell
-
GBP/JPY short-term SMA dead-crosses long-term SMA
-
GBP/USD closing price is below the long-term SMA
-
GBP/USD 60 SMA is lower than it was 5 hours ago
-
If the GBP/USD short-term SMA is also below the long-term SMA, it is the highest priority
-
If GBP/JPY has fallen too much, wait for the first pullback
In this case, ‘yen appreciation’ and ‘pound depreciation’ simultaneously push GBP/JPY down, making it a relatively strong sell setup.
On the other hand, if USD/JPY is falling but GBP/USD is rising strongly, yen appreciation and pound appreciation cancel each other out. In this case as well, skip selling GBP/JPY or use it as a subject for small-lot verification.
How to use GBP/USD after entry
After entry, there is no need to close the GBP/JPY position just because GBP/USD has fallen slightly. GBP/USD is merely a supplementary judgment tool; final stop-loss and take-profit decisions are made on the GBP/JPY chart.
GBP/USD maintains A
GBP/USD deteriorates to B
-
Do not close the position immediately
-
Stop adding new long positions
-
If GBP/JPY has moved more than 1R, consider moving the stop to break-even
GBP/USD deteriorates to C
Once GBP/USD is rated C, increase caution if either of the following occurs in GBP/JPY:
Furthermore, if the USD/JPY 1-hour P&F also reverses to a sell, the initial premise of yen weakness and pound strength has largely collapsed. In this case, prioritize taking profits or exiting the trade.
The key is to make decisions based on ‘GBP/USD deterioration + bearish signs in GBP/JPY itself’ rather than closing based on GBP/USD alone.
The most recommended simple operation method
To avoid adding too many conditions from the start, the following rules are recommended first.
GBP/JPY Buy
-
Both 1-hour and 4-hour USD/JPY P&F are in a buy state
-
First short-term SMA/long-term SMA golden cross in GBP/JPY
-
GBP/USD closing price is above the long-term SMA
-
GBP/USD long-term SMA is at a level from 5 hours ago or earlier
-
If GBP/JPY is more than 0.5 ATR away from the short-term SMA, wait for a pullback
-
After conditions are confirmed, enter at the next 1-hour candle open
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Place the stop loss below the most recent swing low of the GBP/JPY.
-
Only trade when there is at least 2R of upside potential.
If you make a new golden cross on the GBP/USD a mandatory condition, your GBP/JPY entry may be too late. Therefore, initially, the two conditions of ‘GBP/USD closing price is above the 60 SMA’ and ‘the 60 SMA is not pointing downward’ are sufficient. If the 10 SMA is above the 60 SMA, it is considered an even stronger A+ rating.
The primary role of the GBP/USD is to prevent you from buying the pound during a strong downtrend. I believe the most organized way to use these is to use the USD/JPY P&F for market environment assessment, the GBP/USD for approval/pass decisions, and the GBP/JPY SMA cross as the actual entry trigger.
*This article provides general information for the purpose of researching trading methods and does not guarantee profits or recommend any specific transactions. Please make actual investment decisions at your own risk.
