If you want to trade GBPUSD, or cable as it is affectionately known in the trading world this guide will help you to understand the market. The risks, the rewards and the main things to watch out for when trading GBPUSD.
First things first though, if you want to trade forex you need a decent broker. You can compare vetted, trusted and the best brokers for trading GBPUSD here.
What is GBPUSD?
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 money against another foreign currency. It exists because people want to change money.
Pound Sterling is one of the most traded currencies in the world. The City of London conducts a huge slice of FX trading every day. According to the latest Bank of International Settlements (BIS) Triennial Global FX Turnover Survey (Sept 2019, available here), US$844 billion of GBP are traded every day. So GBP is a liquid, easy to trade currency.
|FX||Value Traded (US,Bln)|
Source: BIS (Data as of Apr 2019)
GBPUSD simply represents one particular FX pair – how much US Dollar to convert into one Pound Sterling. Currently the rate is about 1.30, meaning it takes 1.3 US Dollar to change into one pound. Parity means 1:1.
Can you trade the GBPUSD?
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 GBPUSD 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.
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How to learn to trade GBPUSD?
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 GBPUSD? 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/USD.
- 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 GBPUSD?
The biggest risk from trading GBPUSD 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.
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, 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 GBPUSD 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 Sterling-USD 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 GBPUSD 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 GBPUSD price?
Once you have a basic knowledge of the GBPUSD, 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, 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. In markets generally, there is this concept called self-fulfilling loop, which reinforces the prevailing trend.
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 six 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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