Characteristics of the currency pair GBP/USD
If a trader works on the stock market, they can buy or sell stocks, futures, and so on. They are bought and sold for money, for example, in the United States for dollars. The goods, in this case, are shares and futures.
The situation is somewhat more complex on the currency market because it is money that is the commodity.
You have to agree that buying one dollar for ninety cents is a somewhat unprofitable business. Therefore, it is customary on the foreign exchange market to buy and sell one currency unit for another currency unit at a constantly changing market rate.
Thus, if you decide to buy Euros for dollars, it is simply a purchase of a commodity, in this case, Euros.
A trader in the foreign exchange market is just buying or selling one currency unit for another. For example, if a trader decides to buy pounds for dollars, the trader buys the GBP/USD currency pair.
What are currency pairs?
What exactly is a currency pair? This is the relation of two different currencies, one of which is a commodity, and the other is its price. Currencies can be bought for Euros, for Roubles, for Swiss Francs, for U.S. Dollars, for Australian Dollars for Yen, and many more options are available in the foreign exchange market.
With currency pairs constantly fluctuating, speculators have an excellent opportunity to make some profits.
It is worth noting that fluctuations in the exchange rate of a currency pair are affected by factors related to any of these currencies. This means that one will have to keep a close eye on any developments in the world economy and politics that affect any currency in the currency pair that we are operating in Forex.
Types of currency pairs
So, first of all, we should mention how the price of a currency pair is formed.
The quote is how many units of the currency number two in the pair are given for currency number one. For example, suppose the currency pair EUR/USD = 1.3700. This means that 1.37 United States dollars (USD) are offered for a euro unit (EUR).
Quotes can be of three types:
- direct currency quote;
- reverse currency quote;
- cross rate.
1. A direct currency quotation is the amount of a national currency for one unit of a foreign currency. For example, in Great Britain, direct quotes are used when the cost of one American dollar (USD) is estimated in pounds. In other words, the currency pair is USD/GBP.
The currency which is listed first in the pair is the base currency. In direct currency quotations, the base currency is the US dollar. It turns out that it is the dollar that acts as a commodity in such cases.
2. Reverse currency quotation - the value of a unit of national currency expressed in a certain quantity of units of a foreign currency. An inverse quotation is also called a quotation that shows how many U.S. dollars are in a national currency unit. In this case, the US dollar is not the first in the pair but the second. For example, EUR/USD or GBP/USD. Now the commodity is EUR or GBP, and it is suggested to buy them for US dollars (USD).
3. Cross rate - the ratio between two currencies derived from their exchange rates against a third currency. The most often used is the cross rate against the American dollar. A currency pair will not have USD in it, but the USD still indirectly affects the pair. For example, EUR/USD and USD/JPY. So the cross - the couple would be EUR/JPY.
Now it is clear that a currency pair is simply a ratio of one currency to another. In Forex, it is common to see how many units of one currency you can buy for one unit of another currency. It is possible to trade both ways, which means that you can make money on the rise of the market rate and its fall.
The existence of currency pairs makes it possible to demonstrate the numerical value of the currencies we are interested in relative to other monetary units.
International exchanges open and close at different times due to other geographical locations and time zones. Therefore, by adjusting to the schedule of a particular exchange, a person can effectively trade their assets and enter the most vital trends.
Trading sessions are a definite period related to the maximum activity of one of the world's exchanges.
During the most active trading periods, large banks enter the exchange. They increase the liquidity and volatility of the financial asset, due to which a trader can easily buy or sell any volume of currency. With the close of business, the financial institutions stop their activity and work at the exchange is practically reduced to waiting. There are still some single transactions, but trading volumes are too low for full-fledged trading.
The right timing of trading sessions improves the bottom line.
Depending on your own strategy, financial asset and convenient schedule of the day, an investor should determine several intervals for active trading.
Main types of trading sessions
Each marketplace is characterised by its opening hours, depending on the time zone. Financial centres exist in every region. These are large cities comprising a large number of credit institutions, financial institutions and influential corporations. To buy or sell assets of a particular state, one has to act according to its stock exchange working hours. Only in this way will the trader use the considerable financial flows for his enrichment.
Below we look at several trading sessions that every trader should focus on:
1. The American trading session - traders should keep an eye on the New York Bank and watch out for outgoing news. The big financial institutions start buying or selling dollars, after which all currencies change partially. The strengthening or weakening of the American currency is most common during this period. The speculator is advised to pay attention to the US central bank rate and other significant exchange rate shaping factors.
It is notable that during this period, trading becomes more active. This is because players behave very aggressively, intending to get the maximum profit. Therefore, they have demanded very profitable instruments, which imply significant risks in case of false price prediction.
2. The European trading session connects many developed countries. The opening of the exchange is relatively calm. Then, traders begin to receive important news, indicating a fall or rise in quotations.
Currency movements gradually become more dynamic, and there is very high volatility by the middle of the period.
The most profitable financial assets are considered to be pairs with the euro, franc and pound. Shares of local corporations, various futures and commodities are also in demand.
The highest trading volume characterises this period. In just a few hours, a trader can make or lose his deposit. The success on the floor largely depends on the experience.
3. The Asian trading session is characterised by moderate volatility. It is possible to make some quiet and thoughtful deals because the quotes are moving relatively slowly, and the trader has the opportunity to think over his every action. It is recommended to pay attention to news coming from the Japanese Central Bank.
Publications about currency intervention and economic-political news have a significant impact on the movement of quotations.
Most trading in this market is done via the Japanese Yen. Traders shape the value of this asset, which can increase or decrease the currency's value at the end of trading. The vast majority of the participants work on scalping. However, some traders prefer long-term tactics.
4. The Pacific is characterised by the lowest activity. At such moments, the big players leave the floor, so the market is usually flat. Moreover, trading during the sideways movement is considered uncomfortable because it is almost impossible to assume the reversal and earn on the prolonged action. But there are ways to make highly accurate guesses even during the Pacific session.
The most liquid financial instruments are considered to be the Australian and New Zealand dollars. The trading is based on regional characteristics. Local speculators usually trade here, who can quickly analyse the economic condition of their state and make assumptions about the direction of the quotes. Outside players can also take part in trading, but they are advised to be prepared for short and infrequent trends.
Each of these periods is characterised by a different level of activity, key financial instruments and timetable. With these indicators in mind, you can choose the best option for implementing your strategy.
How to use the trading session timetable?
It can be difficult for a new trader to decide on the working hours and the most convenient periods. The following recommendations will help a beginner to understand the peculiarities of each session and choose the appropriate one:
- At the beginning of Asian trading, the market becomes very active. Traders are buying and selling large volumes of goods, and the quote is constantly changing its value. This period is difficult for newcomers, so only the most skilful and experienced speculators linger in this period.
- Pacific trading is characterised by modest rate changes. There is a flat market on the local exchanges, and speculative gains are minimal. This is not a good time to make money, but it allows the beginner to explore the market safely. The pacific slowness enables one to explore the floor with minimal losses.
- Opening sessions are often accompanied by gaps. Gaps are sharp price spikes that can send a quote in any direction. It is impossible to foresee gaps in advance, so traders are not advised to leave their positions for the next day. If the investor needs to execute a long term trade, it is better to secure the order with stop-loss orders.
- There are usually special "thin" periods between sessions. At such times, the liquidity decreases, and the price can no longer hold at its former value. This leads to abrupt and chaotic movements of the quote. Determining the nearest price movement is very difficult, so most market participants wait out the trend for a few hours.
- Speculative trading becomes very dangerous during holidays. This is especially true for the so-called "New Year rally". Large corporations withdraw funds from their accounts, publish their final reports and stimulate investors to make additional stock purchases. News of a company's financial success can move its stock price in either direction, so do not jump to premature conclusions.
Trading time frames
Choosing the best time frame for forex trading is half the battle because the success of your strategy will depend on the time frame you use for trading.
Each of the options has its distinctive features and is not suitable for every trader.
To make the right choice, you should first understand the peculiarities of each time frame.
Types of timeframes
There are many options for dividing time slots, but in practice, the following are mainly distinguished:
- Short-term - basically, this is trading on timeframes such as M1, M5 and M15. The number, in this case, denotes the duration in minutes.
In this case, you can earn only when the trend is moving quite dynamically and by trading high volumes.
This time interval is usually chosen by beginners when trading using the scalping strategy. However, this type of trading takes a lot of time and requires a large amount of money for trading.
- All intraday trading except short timeframes may be referred to the medium-term trading. In this case, trading is carried out on timeframes from 30 minutes to 4 hours. They are abbreviated as M30, H1, H4.
This is the best variant for currency trading as it allows traders to do so at a steady pace using practically any forex strategy. Besides, when calculating the profitability of trades, you will not have to consider any position transfer fee for the next day.
- Long-term trading - in this case, the duration of periods on which trades are executed is more than one day. Such timeframes are named D1, W1, MN for one day, one week or one month.
In practice, it is pretty rare for a trader to hold a position for more than five days. This is due to the need to triple the cost of moving the position through the weekend.
Long-term trading is used when low-volatility currency pairs are used as a trading instrument. In this case, the trader virtually does not participate in the trade, the open position is controlled by placing stop orders, so this option requires the least time.
Forex is essential because it is based on a specific time interval, determined by the trend direction, which can be opposite on two adjacent time intervals. And it is the direction of the trend that is the basis of all trading in the forex market.
GBP/USD currency pair
GBP/USD (British Pound/US Dollar) is an abbreviation for British Pound and US Dollar (GBP/USD) or cross. The currency pair tells the reader how much USD (quoted currency) is needed to buy one GBP (base currency).
GBPUSD currency pair trading is also known as 'Cable' trading.
GBP/USD has a strong potential for its price movement. When important news is released at the Forex market, the currency pair easily breaks through even the most persistent trading levels and makes hundreds of pips in a day. However, due to high volatility, it is mainly traded by aggressive traders with long stops.
This currency pair is one of the most popular pairs at Forex. It is most popular among traders who trade on breakout levels and use aggressive entries.
Forex currency pair GBPUSD features
- GBP/USD quotes.
In GBP/USD numeral, the base currency is GBP, and in the denominator, the quoted currency is USD.
The quotation of GBP/USD is the value of one pound for U.S. dollars.
- Liquidity of GBP/USD.
GBP/USD is a highly liquid currency pair at the Forex market. Hence, both currencies have a high interest among traders. Aggressive traders and breakout traders have an exceptionally high demand for GBP/USD.
Due to traders' high interest and popularity in this trading asset, the high liquidity of GBP/USD appears.
- Volatility of GBP/USD currency pair.
Volatility for GBPUSD is about 225 pips on average per day. On the days of the economic news release, it can even exceed 680 pips within one trading day.
- What affects GBP/USD quotes?
The movement of British pound and American dollar quotes is influenced by fundamental factors such as significant economic news releases, overselling of one of the currencies at the Forex market, and demand for it among traders.
How to start trade GBP/USD in India?
To start trading GBPUSD, choose a reliable broker, then register on the platform's website. The registration process will not take you long. But, first, you will be asked for some information about yourself to be recognised.
After registering, you can try trading with a demo account with virtual money. A demo account is a great way to experiment without the risk of losing money.
If you're ready to risk and start your journey into the world of real trading, you need to open a real account. To do so, make a minimum deposit. Now you can get the full taste of real trading. Have faith in your abilities! Have great trading!