GBP/USD Trading Tutorial

Every investor needs a very liquid currency pair to earn big on forex. One of such volatile currency pairs is the GBP/USD. The volatile nature of this pair helps traders minimize losses. This pair, traded on forex, accounts for over 14% of the total market volume traded daily.

Only expert forex traders take positions on the GBP/USD market for big profits. The pound-dollar exchange combination is among the most active in the forex market. The prevalence of day trading GBPUSD will undoubtedly grow because of the narrow bid-ask margins, turnover, and volatility. 

To join other professional traders in making a profit on the GBP vs USD pair, you need to learn what influences the pair and how to trade it successfully. 

What is GBP/USD Trading?

The GBP/USD fx pair is popularly known as Cable trading. The base currency is the British pound, while the quoted currency is the American Dollar in this pair. The currency pairing informs the customer of the number of US dollars required to buy 1 British pound. For instance, if the combination is going for 1.50, 1 British pound costs 1.5 US dollars.

Price History of GBP/USD

The cable fx pair has had a tumultuous history. Because commerce between Great Britain and the US has been going on for so many centuries, it’s impossible to develop an initial pound-to-dollar currency value. The notion of the GBP/USD as we understand it now did not emerge until the mid-1970s. 

You will benefit more when you understand this history. Here is a complete timeline of the cable price history.

The 1944 Conference

Before 1971, foreign exchange rate history was tied to the value of gold. This was a result of agreements reached by the 44 allied countries in 1944. The effects of which would have implications on the GBP/USD for nearly three decades.

With the collapse of the 1944 agreement (Bretton Woods Conference), the GBP/USD exchange rate started to migrate more radically. During the 1980s, the currency pair witnessed a lot of price fluctuation around that time. Various incidents that happened in 1985 can be blamed for this volatility. These incidents are:

  • A breach in the greenhouse effect that British researchers discovered in Antarctica.
  • The first cellphone call was made in the United Kingdom.
  • End to miners protests by miners.

As a result of this, the GBP/USD fell from 2.44 to 1.05, the couple’s weakest historic trade balance.

Realizing why these market changes occurred can enable you to comprehend better the dynamics that drive the GBP/USD, allowing you to make smarter investment decisions in the future. So, what happened in the United States?

Between 1970 and 1980

The 13-nation body in charge of stabilizing oil, OPEC, determined that crude prices should rise dramatically in the 1970s. A scarcity of oil limited economic production. The 1980s began with a prolonged period of economic uncertainty in the United States.

Job loss was high amid the Vietnam War. This was compounded by the FED failure to take action to combat increasing inflation. Currency values reflected the achievements in the United Kingdom and the inadequacies in the United States. As you might expect, the GBP has risen in value against the US greenback.

With the arrival of Reaganomics meanwhile, the power structure was restored. Increased rates were one of the most significant adjustments used to stimulate demand. The US market quickly rebounded as a result of the tax cuts and war expenditure that ensued.

All of this had a substantial impact on the GBP/USD exchange rate. By the year 1985, the US currency had appreciated by 50% against the world economies.

Price changes in the 1990s

In the late nineties, a further significant phase in the GBP/USD connection history occurred. The Bank of England’s (BoE) involvement was one of the most meaningful events in the existence of the currency.

As part of the ERM (Exchange Rate Mechanism), the Bank of England bolstered the strength of its currency to retain the pound’s worth against the German Deutschmark. The issue was that the UK was in a depression, and increasing lending levels was an ineffective monetary policy.

It was at this period that George Soros and others realized the BoE was in an unreachable situation. His solution was to sell the currency short.

In 1992, Britain exited the ERM and surrendered aspirations of maintaining the pound. The strength of the GBP against the greenback plummeted by 25% only that day.

All of this emphasizes the impact past evidence and facts may have on prospective GBP/USD projections and outlooks.

The Financial Collapse of 2007

In 2008-2009, another significant incident in the GBP/USD pair occurred. However, the subprime mortgage crisis occurred before the global recession of 2008-2009. A handful of prominent US investment companies were little difficulty by the autumn of 2007.

Nevertheless, since the worldwide ramifications were not fully recognized at the time, the GBP gained against the US dollar throughout most of 2007, despite the US industry appearing to be in free fall. The GBP/USD exchange rate was 2.1163 in November 2007.

The Current Exit from the EU

The vote to leave the EU (European Union) in 2016 was one crucial turning point. The GBP/USD currency value and rates moved dramatically. In comparison to the US dollar and other large economies, the GBP value has dropped.

When the outcome was revealed, the pound sank from $1.466 to $1.3694 and subsequently declined to $1.2232 by October 2016, a 16 per cent drop. However, by the beginning of 2017, the pound had stabilized slightly. At the same time, it is yet too soon to determine what effect the ruling will make on the pound in the long run.

It will be necessary to appreciate how factors influence investing in your GBP/USD fx assessment program. In all, understanding the background can allow those forex trading prices to make considerably more logical if you are situated in the UK, the US, Europe, or somewhere else.

The Best Way to Trade GBP/USD

Whichever trading technique you employ, if it’s monthly pivots and research, statistical records in Spreadsheet, or 5-year trends, all of the ideas and approach illustrations below can help.

When is it Right to Trade the GBP/USD Pair?

Most people think traders take positions 24/7 when trading the Cable. This is not true. Of course, the market is open all day of the week. It is not profitable to trade every moment.  

Effective day investors will focus on periods with sufficient fluctuation and turnover to create more significant profits than the difference and transaction costs.

Throughout comparatively slow times, spreads will expand, whereas, in busy ones, they will narrow. So, choose specific time frames when the GBP moves from Friday afternoon to Sunday evening in the US.

The best time to trade is when both UK and US exchanges are active. As a result, day trading the GBP/USD is usually accomplished during 04:00 am and 06:00 am EDT and 12:00 and 15:00 GMT. The greatest daily swings will be found here, and gaps will have less impact on income.

So, whichever method you choose to determine support and resistance lines and other indicators, investing in the busiest times may frequently result in the highest revenue.

Using the Breakout Investing Technique

With the GBP/USD forex market, day trading breakouts are a viable option. You should, however, seek good risk-to-reward ratios. For instance, spending 25 pips while hoping for a profit of 100 pips if right.

If you choose an excessive 1:4 risk/reward proportion, you’ll have a far lower chance of being correct. Furthermore, don’t put too much money on the line with each transaction. Many experts recommend that you only risk 1-2 per cent of your trading funds on one deal. As a result, you will be protected from deficits and will be able to trade another currency day.

How to Use News Headlines for Cable Trading

If you are not too enthusiastic about day trading cable-dollar, 15-minute and 1-hour graphs, as well as analytical predictions, are available. Rather, you may profit from today’s news. Many of the variables that impact the GBP/USD have been discussed on this page. All you should do is be alert and get a strategy ready.

Economic statistics on the jobless rate in the United Kingdom, industrial growth, market mood, and expenditure, for instance, will all cause change.

Live currency news feeds are available via Google Finance or Yahoo Finance. There are other information outlets to use apart from these two. It is possible to get an advantage if you can respond before the broader sector. They also provide all of the GBP/USD rates, predictions, and analyses that you’ll need to assess your holdings.

Furthermore, if your plan is based on Elliot pattern assessment or breakout methods, having the most up-to-date projections for each week can place you in a good situation. Many of the news sites mentioned above give great solutions in this regard.

Between Long-term or Short-term Predictions

Long-term projections may frequently give a technique or, at the very least individual transactions. The majority of FX market participants uses similar long-term projections and business climate projections. As a result, countries and big companies who exchange money do so with the same price fluctuation assumptions. Because the more significant transactions are either maintained or pressed forward, this may frequently result in self prophecies.

However, one note of warning: as is the case with all financial gurus, far too much trust is placed in them. If their forecasts were ever fully documented and evaluated, it’s possible that they wouldn’t be as dependable as everyone thinks.

Benefits of Trading GBP/USD Forex Pairs

Several traders go online each day for a day trading the GBP/USD for varying reasons. You will find some of the most significant advantages below evident once you start trading the cable.

  • Variability: The GBP/USD has a much larger price fluctuation compared to other key pairings. This is partly related to the uncertainty and turbulence of the market. Both of these factors cause forex brokers to provide more significant spread rates.
  • Comparative security: Being two highly developed markets, the GBP/USD provides a wide range of tools for obtaining pricing statistics and research. It is estimated that over 35% of the activity transacted in the Forex market passes via London. This entails both quantity and volatility. These two factors can be exploited to make money.
  • Various trading platforms: The GBP/USD exchange pair is one of the most fluid and low forex pairings accessible. The third most transacted financial instrument, with about 14% of the overall daily market cap, is GBP/USD. Professional day traders have access to a variety of investment instruments and possibilities due to all of these.

When contrasted against other key pairings, investors trading the GBP/USD will gain from a large number of points in one transaction. It’s excellent for breakout trades because of this. Nevertheless, there is a danger associated with this, therefore using short positions is critical.

  • Financial resources: Performing research and evaluation is now quicker than it has ever been in some ways. This is because you can access chart archives, long-term graphs, and 1-minute information with only a few keystrokes. In addition, news outlets and trade platforms will provide short and long projections.

Although there are some advantages to investing in the GBPUSD forex pair, there are also some dangers to be mindful of:

  • Sudden surge: The GBP/USD currency pair may fluctuate quite fast. While this is advantageous for fast, determined operators, it also increases the rapidly losing money. You must be diligent and use reasonable risk and financial planning methods to combat this.
  • Extensive reporting: You may be frustrated if you expected to buy and leave trades solely on simple data like price movement and current average values. Why? The Cable frequently reacts strongly to UK financial figures, particularly whenever information does not match budgetary and fiscal policy predictions and assumptions.
  • Uncertainty: The GBP/volatility USD frequently leads to misleading indications and breakouts. As a result, investors with less expertise may be fooled by conflicting alerts. Others would suggest that novices should concentrate on other exchange pairings instead.
  • Programmed competitors: Even with the recent attractive 30 days and annual advance rates, you’re up against it. This is due to a growing amount of clever algorithmic trading dominating the exchanges. Therefore, gaining an advantage today needs upwards of weekly projections and annual charts.

Thus, while trading the GBPUSD has a lot of profitability, it also has certain disadvantages. Before risking their money on the financial instrument, investors must be informed of both aspects of the issue.

What Affects GBP/USD Forex Pairs

As you may have guessed before looking at GBP/USD decade-long or century-long graphs, numerous factors affect economic psychology and pricing. The following are the essential variables influencing market prices:

  • Capital formation: The dollar generally increases versus the pounds when the US GDP appears to be better than Britain’s. Whenever the British economy beats the US market, the greenback usually falls against the pound. Borrowing rates, worker productivity, and more remarkable development are all factors that can help the economy expand.
  • Politics: As the Brexit vote demonstrated, political choices may cause the GBP/USD FX pair to fluctuate. For instance, national elections may possess a significant influence.
  • Money supply: As shown in the beginnings of this important forex market, the Fed and the BOE (Bank of England) activities may significantly impact yields. Following economic developments and key choices can therefore assist you in achieving a comparative edge.

FX investors must thus comprehend the factors that impact the US market to anticipate the US dollar’s path. After you’ve determined which elements to evaluate, you’ll have to keep track of everything. To do so, take into account the following leading trends:

  • NFP reports
  • Net Exports
  • Non-Manufacturing Index (ISM)
  • The FED meeting outcomes
  • Consumer Price Index.
  • Indicator of Producer Prices
  • Industrial Output and Sales Volumes

What Forex Pairs Correlate With GBP/USD

The influence of currency relationships might not be evident on your GBP/USD real-time display. This may be a term you’ve seen in a discussion group. Here’s how it works:

Since currencies are valued and exchanged in combinations, no one currency is entirely self-contained. Investing the British pound against the Japanese yen usually means investing a Cable counterpart or USD/JPY pairings. This implies that GBP/JPY must be connected to one or both of the other financial pairings to some level.

However, some will go in the same direction, while others will move oppositely. Once you realize this, you may begin to take advantage of the knowledge.

How to calculate currency correlations

Forex pair correlations are best understood as a reasonable method of the partnership between various asset classes. This connection might be anything between -1 and +1. The first implies that the financial pairings will move in opposing ways, whereas the second means that they could trend together. There is no correlation if the coefficient is 0.

How to Choose The Best Cable Trading Broker

When choosing an online brokerage firm, there are several key considerations necessary to remember. These are:

  • Make sure your firm has a minimum of a two-year track record.
  • Make sure your trading firm has a minimum of the 15-person customer service team.
  • Ensure that the Fx broker is licensed by a country that can punish a broker for its mistakes. Or, look for a company that can act as an arbitrator in the event of larger disagreements.
  • Examine to see if your broker can handle the usual transaction processes. For instance, process funding and payouts within three days. When removing money, this is critical.

Conclusion

The GBP/USD Fx pair draws investors from all around the globe as two of the most commonly traded economies on the planet. Tight bid-ask margins and a diverse range of trading instruments, such as futures contracts will keep attracting new investors. To earn in the crowded currency market, though, you’ll need to locate an advantage.

Trading in live charts is never simple. Using quantity and day investing at particular times will help you to provide significance to price swings. You can also discover good financial possibilities by using indicators and patterns.

If traders can achieve that while avoiding the various dangers, you could be on your way to following in the footsteps of accomplished forex investors similar to George Soros and Richard Dennis.

FAQ

Is it a good time to buy GBP with USD?

The best time to trade is when there is a high market activity. This time often correlates with the UK trading session, which is active from 7 in the morning to 4 in the evening (GMT). Although, the forex market is available to traders 24 hours a day, seven days a week. This does not mean you should take positions whenever you feel like it. Also, refrain from trading when you are in a bad mood.

Why is the GBP/USD forex pair called Cable?

The slang is given to the dollar-pound pair to indicate the cable passes through the Atlantic Ocean to communicate the exchange rate between the US and UK. The transatlantic telecoms cable was passed in the nineties to allow fast communication between London and New York. Sometimes, traders using similar slang to denote only the British currency.

Why is GBP so strong?

The inflation rate in the UK is low in relation to other countries. As such, the government has a high purchasing power, so the rate is strong against the greenback. Other reasons for the British sterling’s strength is the country’s strong laws and numerous exports.

Is GBP/USD the same as USD/GBP?

No. GBP/USD means the number of American dollars that can be gotten from one British pound. On the other hand, USD/GBP implies the number of British pounds that can be gotten for one dollar. You can view these rates on a live trading chart.

What is a reasonable USD vs GBP rate?

The American dollars and British pounds are two of the most traded currencies in the world. This is why when paired against each other, the rates are constantly changing rapidly. The latest GBP vs USD rate is available on all online trading platforms.

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