Why Trade GBP/USD?
In the forex market, traders buy and sell currency pairs; a currency cannot be traded ‘by itself’. GBP/USD is the third most traded currency pair, after EUR/USD (euro against the dollar) and USD/JPY (dollar against the yen). GBP/USD accounts for about 10% of total global forex volume, which is over $5 trillion in daily average turnover. The US dollar and the British pound are both stable currencies that are widely traded, which makes the pair a solid choice for a currency pair to trade.
How to Trade GBP/USD?
As we discussed earlier, the pound is traded on the forex market as a currency pair. For example, one could trade EUR/GBP (euro against the pound) or GBP/CAD (pound against Canadian dollar). We will focus on GBP/USD.
If we go on the internet and check a bank or forex website, we can find that the current price for GBP/USD – let’s assume the price is 1.3010. This is also called the exchange rate between the two currencies. This means that 1 pound is trading at 1.3010 U.S. dollars, so in order to purchase 1 pound, you would have to pay US$ 1.3010. If the pair moves higher, for example, to 1.3060, this means that the pound has strengthened (appreciated) against the dollar. Conversely, if the pair drops, say to 1.2950, then the pound has weakened (depreciated) against the dollar.
Since we are trading a currency pair, we can also make a trade in which we sell the pound against the US dollar. For example, a trader could sell GBP/USD at 1.3100. If the rate then drops to 1.3050, they can now buy those pounds back at the cheaper rate, with the difference of 50 pips between the two rates being her profit.
Keep in mind that, like the stock markets, exchange rates are constantly fluctuating. Traders are always looking to make a profit by ‘buying low and selling high’ – in the case of forex, this means buying a currency pair at a low rate and then selling it a higher rate.
Although exchange rates are constantly fluctuating, the actual movement is usually very small. Most currency pairs are quoted to the fourth decimal place, which is called a pip. The pip is the basic unit of measure used in forex trading.
Suppose we want to trade GBP/USD and the current price is 1.3050. If 30 minutes later GBP/USD has risen to 1.3100, then it has increased by 50 pips. Although a pip is a very small number, a movement of even one pip can mean significant profit or loss for a trader, because forex trades are usually heavily leveraged (we will explain leverage shortly).
Let’s use this example to understand how to trade GBP/USD and make a profit:
We said that the current price of GBP/USD is 1.3050. If you purchase 100,000 pounds at that rate, it would cost you US$ 130,050. Now, when GBP/USD rose to 1.3100, the pair has increased by 60 pips. This means that the value of your U.S. dollars has risen to $131,000. If you were to close your trading position and sell that pounds that you bought earlier, you would have made a profit of $950 (131,000 -130,050).
Watch this video: How to trade the GBP/USD Pair (07mins 05secs)
If you’re saying to yourself, “sounds great, but I don’t have a spare $130,000 lying around!”, you need not worry. If you want to make a trade and purchase 100,000 pounds with U.S. dollars at a rate of 1.3050, you aren’t expected to put $130,500 in your trading account. Rather, traders use leverage, which allows a trader to open a position which is much larger than the amount of capital which they need to put down. The leverage is provided by the forex broker, who is the intermediary between the trader and the forex market.
If a broker is providing you with 100:1 leverage, for example, this means that you can control a position of 100,000 pounds, but you only need to put down 1,000 pounds in your trading account. Great, right? Well, yes, but a note of caution – while leverage allows a trader to control very large positions, keep in mind that leverage carries with it significant risk, so it is always important essential to “handle leverage with care”. Leverage is a wonderful trading tool, but it should always be used in a responsible and disciplined manner.
Technical and Fundamental Analysis
In order to be successful when you trade GBP/USD, you need to be familiar with two methods which are used to follow the markets and try and forecast in which direction GBP/USD might behead. The two most popular methods utilized in forex trading are technical analysis and fundamental analysis. You may prefer one method over the other, or decide to use both methods in your trading strategy. Let’s briefly review these two methods.
- Technical Analysis
Technical analysis focuses on the price movement of an asset, which in this case is GBP/USD. Traders examine the historical movement of the currency pair through trends and patterns, with the aid of charts and graphs. The identification of patterns is then used to predict future price movement. Technical traders observe parameters such as support and resistance levels, as well as indicators which are based on price or volume.
- Fundamental Analysis
Fundamental analysis examines economic and other developments that can affect the movement of a currency pair. Key events which can move the markets include Gross Domestic Product (GDP), employment reports and interest rate moves. These economic and political events are known as fundamentals. If you are trading fundamentals, you should be paying close attention to events that are being released on that day (and several days ahead). An important tool for forex traders is the use of an economic calendar, which lists economic and political events that may have an impact on the forex markets.
When is the Best Time to Trade GBP/USD?
A major advantage of forex trading is that the forex market is open 24 hours, six days a week. However, some times are better to trade than others. As a trader, you want to be engaged in the market when there is some volatility, which provides the opportunity to profit on price movement. If we analyse daily volatility, it is apparent that GBP/USD shows a peak in volatility between Tuesday and Thursday. The reason for this is that trading activity starts slowly on Sunday and picks up the pace on Monday before reaching its peak in mid-week. After Thursday, activity lessens and comes to a complete halt on the weekend. Thus, the best time to trade GBP/USD is mid-week. Of course, this doesn’t mean that you can’t make winning trades on other days, but mid-week trading is likely to provide the greatest fluctuation in the currency pair’s movement.
What is the best time of day to be trading? As we mentioned, the forex markets are open 24 a day, and there is some overlap between the different time zones. The two largest markets, New York and London are open for trading (between the two of them) between 8:00 and 22:00 GMT. The ideal time to trade GBP/USD is when both of these markets are open, which is when forex trading is most active. This window is a 3-hour span, between 13:00-16:00 GMT. The biggest daily moves from GBP/USD usually take place during this window, which would be the preferred time to make trades.
Once you are ready to trade GBP/USD, you will need to choose a forex broker. The broker will provide you with a trading platform, which allows you to make live forex trades. However, it is highly recommended that you first make trades on a demo (practice) account; this allows you to trade GBP/USD in a practice format, without any risk. Once you have become thoroughly comfortable with the trading platform, you can then engage in live trading.
GBP/USD is one of the most popular currency pairs and is an excellent choice for forex traders. We hope that this blog has provided you with some useful insights on how to trade GBP/USD. We wish you the best of luck in your forex trading!
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