forex-scalping.com

Correlation caps for yen trading look simple until a risk-off day arrives. I ended up writing rules for a handful of edge cases.

The basic cap: combined risk on USDJPY plus any yen cross cannot exceed 1.5R at any time. If I am long USDJPY with 1R at risk, I can only add 0.5R on something like EURJPY or GBPJPY.

Edge case one: risk-off days. When equities drop sharply, almost every yen pair moves in the same direction. On those days I treat all yen exposure as a single position and cap it at 1R, not 1.5R. The cap biting harder is intentional.

Edge case two: hidden exposure. A short EURUSD and a long EURJPY look unrelated but together they are partly a short USDJPY. I check net currency exposure, not just pairs.

Edge case three: BOJ or Ministry of Finance headlines. Any intervention talk means yen exposure goes to zero until spreads normalise. No exceptions, even if the trades are profitable.

Edge case four: Tokyo fixing around 01:55 London. I do not trade it, but I note it because it can leave odd levels for the London open.

The advanced part is not the maths. It is respecting the cap on the days when it feels most restrictive.

One small correction on edge case two, unless I am misreading it. Short EURUSD plus long EURJPY leaves the euro legs cancelling, so you end up long dollar and short yen, which behaves like a long USDJPY.

I learned that one the expensive way. I held exactly that pair of trades on a risk-off morning, felt diversified, and when USDJPY dropped 60 pips the combination lost like a single oversized long.

Since then I convert every open position into currency legs before adding anything. If the net yen figure is already short by more than 1R equivalent, the new trade waits, whatever the pair is called.

On the Tokyo fixing, I see the same odd levels you mention, mostly on Gotobi days. I just mark the 09:55 Tokyo price as a reference line and let London show me whether it matters.

Does your cap treat CHF crosses as yen exposure on risk-off days? On the sharpest sell-offs I have seen them move almost in lockstep.