Are you overwhelmed by the jargon in the foreign exchange market, don’t know where to start? Fear no more. This guide to trading EURGBP will help you to understand the market.
First things first, if you are looking to trade EURGBP, you can compare the best brokers for trading EURGBP here
What is EURGBP?
All sovereign countries issue their own national currency. For the UK, its currency is the Pound Sterling (ticker GBP).
Forex (FX) is the short name for ‘foreign exchange’. It is a market about trading money. Unlike stocks, FX is about measuring one currency against another currency.
For 19 Eurozone members, their currency is the Euro (ticker EUR). The exchange rate between Sterling and the Euro is EURGBP.
EURGBP simply represents one particular FX pair – how much Sterling to convert into one Euro. Currently the rate is about 0.85, meaning it takes 0.85 Pound Sterling to change into one Euro. Parity means 1:1.
The Euro was created on December 31, 1998 when thirteen countries decided to scrap their own currencies and move into one currency. The newly created central bank of these countries using the Euro is the European Central Bank (ECB), which set the monetary policy for the Euro.
Given that the Eurozone is one the of most developed blocs in the world, the Euro is also one of the most traded currencies in the world with its daily transaction value estimated by the BIS at US$1.59 trillion (2016). So it is a liquid currency.
|FX||Value Traded (US,Bln)|
Source: BIS (Data as of Apr 2019)
Can you trade the EURGBP?
You certainly can. Forex is a 24-hour, 5-days a week market. Prices never stop blinking. You can trade forex with CFDs futures, forwards, spread bets, or even exchange-traded funds (ETFs). Because of this liquidity, there are forex trends that astute traders can exploit.
You can trade EURGBP with either spot rates or future prices. Spot rates settle and rollover every session, while with currency futures you only need to rollover at expiry time, usually at the end of March, June, September and December. For example, CME lists the some of the EURGBP futures contracts.
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How to learn to trade EURGBP?
Trading FX markets is easy. Trading FX markets successfully is not. But anyone can succeed provided they take the right approach.
Watching the exchange rate and learning its day-to-day behaviour is one key success factor. Remember, you do not trade markets. Rather, you trade your beliefs and understanding about the market. Write down any pattern you think is relevant about the rate. Test these patterns against its past movements. Do they work?
Paper trade for a few months. Work out if the currency is suitable to your trading strategy.
Can you make money trading EURGBP? You certainly can! However, you can also lose money quickly. You need to run the right strategy at the right time.
You need to deal with probability too. Nobody get it right every time. Sometimes you win, sometimes you lose. To win out in the long run, you have to cap your losses and max your gains.
Position size your trade in a way that even if prices move significantly against you the overall portfolio remains viable.
A practical guide to trading GBP/USD is as simple as:
- checking your leverage value, it will normally be represented as two numbers like; 1:50, 1:100 or 1:200
- choose a broker to trade forex with
- select the currency pair you wish to trade, like EUR/GBP.
- add a stop loss or automatic close to your order
- choose whether to buy or sell on your trade
What are the major risks of trading EURGBP?
The biggest risk from trading EURGBP is that you are on the “wrong side” of the trend. When you realise this, abandon the trade as soon as possible. Do not hope that the market will turn in your favour – because it may not.
Many traders use stop losses as a guard to prevent a losing trade from ballooning. You should do so too. Remember this: a big loss comes from a small loss.
Another risk factor comes from the pattern of the rate. In other words, the rate is not ‘trending’ either up or down enough. It becomes harder to exploit price movements because there is insufficient distance between the entry and exit points.
The next risk factor relates to extreme price moves. These days in the FX market, there is a tendency for a rate, in some quiet time zones, to move violently. It happened to Pound Sterling a while back and Japanese Yen earlier in Jan ’19. The proliferation of algorithmic trading and temporary structural mishaps may gave lead to volatile trading. During these periods, transaction costs are likely to go up simply because brokers may exit the market temporarily.
On Sterling pairs like EURGBP, Brexit is another to watch for. Just recently, Sterling jumped when the Conservatives won the election.
The last risk factors concerns leverage. Many retail FX accounts lose capital over time because of the overly high leverage. Minute, random price movements decimate accounts equity quickly if traders are caught on the wrong side. Small losses piled up. This can lead to an early termination of the account.
Where to find EURGBP news and forecasts?
The first step to find out more about a foreign exchange rate is to read daily news about it. In particular, you need to pay attention to three things that will impact the EUR-Sterling exchange rate:
- Regular data releases.
- Central bank meetings and monetary policies
- Ad-hoc international financial meetings, eg G7 Ministerial or Eurogroup meetings.
Google ‘FX News’ and there will be a list of good websites detailing FX trading. Read recent news about EURGBP will tell you what is impacting the rate. Look for major news agencies such as Reuters.
Also remember to look at data releases for the week ahead. This will give you some ideas about the forthcoming things that traders will be looking at. In most tables there will be a row of ‘expected value’ of the data. Note them.
What moves the EURGBP price?
Once you have a basic knowledge of the EURGBP, you then progress to understand the following:
- Investor expectations
- Market psychology
- Dealing with unexpected events.
Data flow, by itself, seldom move markets significantly. It is the prior expectations that cause sharp moves. Pay attention to the market reaction (to any data) since it will tell you a lot about market expectations. Sometime prices can drift in the direction of the initial reaction for days, thus creating opportunities.
On market psychology, you will have to read lots of positioning reports, sentiment data, and price trends – and draw your own conclusion. Does it make sense? The longer the price trend, the more extreme market psychology becomes. Technically, the rate could become ‘overbought’ or ‘oversold’. In markets generally, there is this concept called self-fulfilling loop, which reinforces the prevailing trend. But at extremes, you will have to be extra careful because the trend may snap.
Lastly, you will have to guard against surprising events, such as verbal interventions by important policymakers. In the UK, such interventions are rare but it does happen. In April 2018 for example, Sterling was recovering until the governor said that a rate hike in May is not a ‘foregone conclusion’ (FT Paywall). Sterling peaked and went into a downtrend for the next four months. To deal with unexpected events, you will have to incorporate risk management into your strategies including mandatory stops, risk sizing, and diversification.
What are the cost of trading GBPUSD?
Given that FX trading are mainly financial trading – without any underlying currencies changing hands, there are a few trading costs you need to be aware of:
- Commission (if any)
- Bid-ask spread (the difference between buying and selling at any time)
- Rollover costs – this is the cost of rolling over current positions
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Jackson has over 15 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.