GBP/USD forex trading, so-called ‘Pound Dollar,’ measured in the forex trading as the most liquid currency pairs. The trading pair is set to rise in the day trading through the combined spreads, volume, and volatility. This article breaks down everything you need to know about the GBP/USD pair, from its history up to its benefits and risks. You will also learn lots of trading strategies for 2019.
What is GBP/USD?
Table of Contents
- 1 What is GBP/USD?
- 2 Reasons To Trade With GBP/USD
- 3 The Risks And Drawbacks Of GBP/USD
- 4 Influences On Movement
- 5 Currency Correlations
- 6 Calculation
- 7 Day Trading Strategy For GBP/USD
- 8 History
- 9 The Role Of Great British Pound
- 10 The Role Of US Dollar
- 11 Final Word
Before we proceed to the main topics, what does an abbreviation GBP/USD means? GBP/USD is a currency pair that tells how many US dollars are needed to buy one British pound.
According to the recent update, the GBP/USD pair stands among the five most traded currency pairs worldwide. The intervention of the Bank of England and the Federal Reserve affects the currencies’ value due to the interest rate gap.
Reasons To Trade With GBP/USD
There are lots of reasons why thousands of people opt for this particular currency pair, such as:
- Availability of resources – Conducting technical analysis is easier today by just a few clicks away. Graph history, long-term charts, 1-minute data, news resources, and trading forums are some of the available resources used for present and long-term forecasts.
- Volatility – Price ranges vary in currency pairs. GBP/USD often has a more extensive price range than the other major pairs because of volatility. These result in higher spread quotes from the brokers.
- Diverse Trading Vehicles – Because GBP/USD became the third most traded currency pair, traders have the right on a range of trading vehicles and opportunities.
- Relative Safety – GBP/USD are the two most modern economies in today’s trade. It offers multitudes of resources in finding price information and data. Volume and volatility work together in turning profits, whereas approximately 35% of volume trade in FX markets goes through London.
- Maneuverability – Day trading the GBP/USD is ideal for breakout trading. It is because of the benefit coming from a sizeable number of pips within a single move, unlike the other major pairs. Risk is likely to take place, so it is necessary to utilize stop losses.
The Risks And Drawbacks Of GBP/USD
Given the number of reasons to pick out the GBP/USD currency pair, yet, there are certain risks to be aware of. Here are the drawbacks in trading with GBP/USD:
- Ambiguity – First-timers in trading are much prone to be victims of misleading signals. False signals and false breakouts are the effects of the unpredictability of GBP/USD. With that, some argue that beginners are better off in focusing on other currency pairs.
- 2. Rapid Movement – Fast trading is excellent for decisive brokers, but speedy trade results in losing money quickly. To be self-disciplined in employing strategies on effective risk and money management can solve the problem.
- Automated Competition – Intelligent trading algorithms are increasing in number year after year, which brings a severe challenge for most traders. Automated competition pushes you to have more than weekly forecasts and yearly charts compared to before.
- Report Heavy – Closing prices and average daily ranges are crucial when you hope to enter and exit positions based on straightforward information. It is through UK economic reports the cable often responds, especially when data and the monetary policy does not meet expectations.
Therefore, if you plan to invest in the GBP/USD currency pair, being aware of both sides of the coin you are taking risks is essential.
Influences On Movement
Several factors influence market sentiment and prices, which include the following:
- Monetary Policy – In the history of major currency pairs, Fed and BoE seriously influence trading rates. Keeping up with the economic announcements and major decisions could bring you in a competitive edge.
- Economic Growth – The growth of the US economy will reflect US dollars rise over pounds; likewise, weakening dollars results from the growth of the UK economy. An increase in currency pairs is a result of interest rates, labor productivity, and increased investment.
- Political Events – According to Brexit decision, political decisions can influence the movement of the currency pair. Notably, significant elections have a noticeable impact on the trading movement.
Currency correlations may be a phrase you have come across without a more in-depth understanding of it. Let’s dig deeper below!
There is no such thing as an independent currency pair. Trading a British pound against the Japanese Yen involves a derivative of GBP/USD and USD/JPY currency pairs. In other words, currency pairs such as GBP/JPY are to be related to other currency pairs.
It is a range from -1 to +1. Others move in the opposite direction while some move in line with each other. The correlation is arbitrary at zero range. Having an idea of it could be your advantage.
Use the Excel spreadsheet to calculate currency correlations right away through the correlation function (=CORREL). It delivers efficient results in a bit.
Input all the required data in columns and then proceed in getting the final figure of correlation between the currency pairs.
Bear in mind that correlations can change over time as a result of economic growth, plus monetary policy and political events.
Day Trading Strategy For GBP/USD
Any trading plan coming from weekly pivots and analysis, or past transactions in 5-years average will be of use of the following strategies, including:
Being in tune with your trading platform in buying and selling can be done all day as the most forex market is open 24-hours a day. It leads to common misconceptions on day trading GBP/USD.
Sufficient volatility and volume in generating earnings over the cost of spread or commission is one way for the successful traders to gain improvement. Spreads widen and narrow during quiet and busy periods, respectively.
The best time of trading GBP/USD currency pair is when both the UK and the US markets are open. It is between 08:00 and 10:00 GMT and 12:00 and 15:00 GMT. During these times, you will encounter the prime daily moves, and the spreads do not substantially influence profit.
For you to yield an enormous profit potential, choose to trade at the most active periods as such. The technique for identifying support and resistance levels as well as signals does not matter at all.
Two time frames are involved in making decisions. Identifying the primary trend requires the use of the daily timeframe. While in entering your trades, you can view the 4-hour timeframe.
You can use two forex indicators. It includes slow stochastic indicator and the exponential moving average (EMA) in the application of the said strategy, both in buying and selling rules.
4-hour GBP/USD strategy benefits the number of pips if the current trend is strong. Also, entering the trend on or after the EMA crossover happens is an advantage rather than doing it halfway through.
Opportunities are coming your way when you opt to trade breakouts with GBP/USD currency pairs. There must be solid risk-reward ratios of 1:4, such as risking 25 pips to aim 100 pips. Do not risk more than 1-2% of your capital per trade to protect yourself from losses and to face another forex day.
Long-term forecasts and economic outlook predictions help you figure out possible strategies in the forex market. Most corporations engaged in forex trading are exchanging currency based on the same price movement predictions. It leads to self-fulfilling forecasts on trades either being held or being pushed through.
As ever, putting so much confidence to economic experts is very risky, especially when the assumed predictions are not well recorded and tested.
Having no interest in day trading GBP/USD via timeframes, charts, and technical forecasts have an alternative. You can opt to trade through updated trading news. It covers all influential factors on GBP/USD, and you have to tune in.
Reports on UK spending, manufacturing growth, unemployment rate, and consumer sentiment are examples of trading news.
Here are some live forex news updates that show GBP/USD rates, forecasts, and commentary that you can trust:
Of all the prior strategies, getting the latest estimates will put you in a higher position. The said news sources render excellent services for your good.
The Early Days Of GBP/USD
The concept of GBP/USD started to exist in the 1970s, wherein the forex rate was tied to the value of gold. This idea came from the Bretton Woods Conference during 1944, which take effect on the GBP/USD for almost three decades.
As the years pass by, GBP/USD developed a more dynamic relationship resulting in substantial price movement between the pair. These changes happened due to several events that arose in 1985. During those years, the lowest exchange rate for GBP/USD sunk from 2.44 to 1.05.
The exchange rates are affected by the success in Britain. Also, the US’ shortcomings throughout the years until the US economy boomed once again.
In the early 1990s, another historical period for GBP/USD relationship entered. It is when the Bank of England (BoE) attempted to maintain the pound’s value against German Deutschmark. While in fact, the UK was under recession and rising interest rates during those times.
The plan did not work out, and in just one day, the pound dropped against the dollar of about 25% in value.
These historical facts and data can have an impact on trading forecasts with GBP/USD.
Before the global depression in 2008-2009 has occurred, major US financial institutions were in trouble in the prior year. Global implications were not clearly understood, which causes GBP to rise against the US dollar. US economy ends up failing during 2007. The GBP/USD rate stood at 2.1163
Year after, significant changes take place as BoE fully realized the extent of the damage. BoE cuts the bank rates, which demonstrates the effects of monetary policy on the currency pair. It allows more accurate forecasts on future events.
The 2016 Brexit decision makes the pound value sunk against the US dollar and other currencies. It reaches a fall of 16% by October 2016, but the pound stabilizes in mid-2017.
Knowing the events that influence trading, whatever the based is, will make sense in the future. Plus, the context of live trading rates will have a long-term impact on future trading decisions.
The Role Of Great British Pound
The UK is such a small region but has the biggest economy in the world. International financial markets are never complete without London’s forex trading. The British pound is the world’s unauthorized reserve currency.
World wars brought a relative decline in the UK, while the US gained the most dominant economic power. UK economy slowly becomes stable through government regulations and restricted labor markets. The UK is also next to Norway, which has the most massive oil and gas production.
It conveys an abundance of trade opportunities within a highly competitive and volatile trading area. Therefore, GBP/USD investing is well-to-do.
The Role Of US Dollar
Understanding the crucial roles the US dollar plays is a win-win part of trading economics. Here are the notable characters of the US dollar in your trading experience:
- The US dollar is the world’s reserve currency in settling international transactions.
- The US comes after China as the world’s largest trading nation.
- Prices of traded commodities like gold are often set in US dollars.
- OPEC transactions are in US dollars.
- The US plays a major role in electronics, aerospace, construction, petroleum, and many more machinery.
- The US dollar is popular as a dominant currency pair.
The US economy is influenced by many economic indicators to forecast the directions it will go. Here are some economic indicators you should consider:
- Consumer Price Index (CPI)
- Producer Price Index (PPI)
- Retail Sales
- Non-farm payrolls
- Federal Reserve Minutes
- Trade Balance
As two most-traded currencies in the world come in pair, day traders globally adore GBP/USD offered opportunities. Many aspiring traders come into profit as they find an edge on the trading platform. Signals and trends help the traders out in spotting the most promising financial forecasts. Keep an eye on the timing strategy because it says a lot to utilize your trading transactions.
Continue striving in spite of all the risks along the way. Successful forex traders like Micheal Marcus and Paul Tudor Jones also took the first step just as you are now.