The cost of trading USD/JPY, and the swap trap

USD/JPY has a tight spread and good liquidity, so it looks
cheap. It is also the pair where the real cost diverges furthest from the spread — because of
swap.

1. A JPY pip is different

On most pairs one pip is 0.0001. On JPY pairs, one pip is 0.01. Apply the wrong
rule and every risk calculation you make is out by a factor of 100.

Pip value on one lot is not fixed as it is on EUR/USD;
it depends on the prevailing rate: 1,000 ÷ the USD/JPY rate. Around 150, a pip is
about $6.70.

2. The spread cost

Typical spreads: 0.1–0.3 pips on a Raw account, 0.9–1.5 on Standard. At 1.0 pip on Standard: 1.0 ×
6.70 ≈ $6.70 per lot.

Cheaper than EUR/USD at the same pip count — which is why the pair looks attractive to
newcomers.

3. The trap is in the swap

USD/JPY carries the widest rate differential among the
majors. The consequences:

• Long USD/JPY — usually receives positive swap, since you hold the
  high-rate currency and sell the low-rate one.
• Short USD/JPY — usually pays a fairly heavy negative swap, eating into
  the position every night.

Newcomers often short USD/JPY to catch a top and then hold for weeks. The spread is paid once; the
swap is paid nightly — and after three weeks the swap can be several times the spread.

4. Working it out

Say short one lot at −$11 a night, held 20 days (including three Wednesdays charged triple):

• Charged nights: 20 + 3 × 2 = 26
• Swap: 26 × 11 = $286
• Spread: about $7

The cost of holding is forty times the cost of entering. No spread figure tells you that.

5. What to do about it

• Before holding overnight, open the
  contract specification and read the swap for
  the direction you intend to take.
• On the heavily negative side, consider shortening the hold or moving to a lower timeframe.
• On the positive side, do not let it become a reason to hold a bad trade — positive swap does not
  rescue a wrong call.

And for the cost you cannot avoid, a rebate returns part of it on volume, independently of whether
the trade won or lost.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.