These two pairs are +90% correlated BUT the levels vary with GBPJPY being approximately twice as volatile as USDJPY . With that said you GBPJPY position size should be smaller than your USDJPY position size.
Some traders may believe that Shorting GBPUSD is the same as taking the correlation position which we are recommending. Nothing can be further from the truth! Several reasons:
1) The correlation trade includes JPY and it's economy. How the U.S. economy reacts to the Japanese economy at times will differ from how the U.K. economy reacts to the Japanese economy.
2) The correlation trade greatly reduces directional risk. Either of our positions could work out for us to make money. We could be dead wrong on one pair while the other gives us a profit of more than the pair we are wrong with.
3) The GBPUSD position is all about directional risk, just like any time you place a trade in one single pair. Barring any strategy, indicator, algorithm, etc....a trader has 50/50 odds with a directional trade. NOT in a correlation trade!
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