The British pound/US dollar pair is one of the most liquid currency trades in the forex space. The tight bid-ask spreads, volume and volatility, all ensure the popularity of day trading the GBP/USD is only set to rise. This page will break down everything you need to know, from the history of the GBP/USD pair to its benefits and risks. Strategies will then be offered, including technical analysis, trading hours, plus forecasts for 2018.
GBP/USD Trading Brokers
Why Day Trade GBP/USD?
There are a number of reasons why thousands of people everyday head online to day trade the GBP/USD. Some of biggest benefits are detailed below.
- Volatility – You will often find a wider price range with GBP/USD compared to other major pairs. This is in part due to unpredictability and volatility. Both of which result in higher spread quotes from forex brokers.
- Relative safety – As two of the most modern economies in the world, the GBP/USD offers a multitude of resources for finding price information and data. It is thought approximately 35% of the volume traded in the FX markets goes through London. This means volume and volatility, both of which can be used to turn profits.
- Diverse trading vehicles – The GBP/USD is one of the most liquid, cash rick currency pairs available. GBP/USD is the third most traded major currency pair, consisting of around 14% total daily trading volume. All of this means a range of trading vehicles and opportunities are available to switched on day traders.
- Manoeuvrability – Those day trading the GBP/USD will benefit from a sizeable number of pips in a single move when compared to other major pairs. This makes it ideal for breakout trading. However, this does also bring with it risk, so utilising stop losses is important.
- Availability of resources – In certain respects, conducting technical analysis is easier today than ever before. This is because you have graph history, long-term charts and 1-minute data just a few clicks away. Also, news resources and trading forums will offer predictions for today and long-term forecasts.
Whilst trading GBP/USD forex appeals for a number of reasons, there are also certain risks to be aware of:
- Rapid movement – The GBP/USD can move extremely quickly. Whilst this is great for fast, decisive traders, it also means you can lose money quickly. To counter this you need to be disciplined, employing effective risk and money management strategies.
- Report heavy -If you were hoping to enter and exit positions based on straightforward information, such as closing prices and average daily ranges, you may be disappointed. This is because the cable often responds significantly to UK economic reports, especially when data does not marry with monetary policy speculation and expectations.
- Ambiguity – The volatility of the GBP/USD often results in false signals and false breakouts. This means traders with less experience may fall victim to misleading signals. Some may argue that beginners should instead focus their attention on other currency pairs.
- Automated competition – Even with competitive 1 month and yearly forward rates, today you face a serious challenge. This is because the markets are dominated by an increasing number of intelligent trading algorithms. As a result, you now need more than weekly forecasts and yearly charts to assert an edge.
So, day trading the EUR/USD may offer plenty of profit potential, but it does have its drawbacks. Those investing in the currency pair should be aware of both sides of the coin before they risk their capital.
Influences on Movement
As you have probably gathered without the use of GBP/USD 20-year, 50-year, and 100-year charts, several factors shape market sentiment and prices.
The most influential of which are as follows:
- Economic growth – When the US economy is looking stronger than the UK’s, the dollar usually rises against the pound. Likewise, when the UK economy outperforms the US’, the dollar normally weakens vs the pound. Interest rates, labour productivity, and increased investment can all boost growth.
- Political events – As seen with the Brexit decision detailed above, political decisions can trigger movement in the GBP/USD currency pairing. Major elections, for example, can have a noticeable impact.
- Monetary policy – As seen in the early history of this major currency pair, the actions of the Fed and BoE can seriously influence rates. So, keeping abreast of economic announcements and major decisions could help you assert a competitive edge.
What may not be clear on your GBP/USD real-time chart is the impact of ‘currency correlations.’ This may just be a phrase you have come across in forums. Here is a breakdown:
Because currencies are priced and traded in pairs, no single pair is totally independent of other pairs. For example, if you are trading the British pound against the Japanese yen (GBP/JPY), in reality, you are trading a derivative of the GBP/USD and USD/JPY pairs. This means that to some extent, GBP/JPY has to be related to either or both of the other currency pairs.
But whilst some will move in line with each other, others will move in the opposite direction. Once you realise this, you can begin to use this information to your advantage.
It is best to think of correlation as a statical measure of the relationship between currency pairings. This correlation can range from -1 to +1. The former suggests the currency pairs will move in opposite direction, whilst the latter suggests they will move in the same direction. If the correlation is zero, the relationship is arbitrary.
The most efficient way to get your head around currency correlations is to calculate them yourself. Fortunately, it is relatively straightforward. An Excel spreadsheet will be your calculator, as you can use the correlation function (=CORREL).
Once you have that, do the following:
- Input pricing data for your two currency pairs, for example, GBP/USD and EUR/USD.
- Create two individual columns, each titled with one of the pairs.
- Now fill the columns with the past daily prices over the time period you are using.
- In an empty box at the bottom, type in =CORREL.
- If you highlight all the data in one of the columns, you will get a range of cells in the formula box.
- Then simply type in a comma.
- Follow steps 3-5 for the other currency.
- Now close the formula. It should then look like =CORREL (A1: A25, B1: B25)
- The final figure you get is the correlation between the two currency pairs.
It’s also worth bearing in mind, over time correlations can change. This can be as a result of monetary policy, plus economic and political factors.
Day Trading GBP/USD Strategy
Whatever your trading plan, whether it relies on weekly pivots and analysis, or historical data in Excel and 5-year averages, all the points and examples of strategy below can be of use.
There is a common misconception when day trading GBP/USD, that because the forex market is open 24-hours a day, you should be tuned in to your trading platform buying and selling all day. This is simply not the case.
Successful day traders will hone in on times when there is enough volatility and volume to generate earnings greater than the cost of the spread and/or commission.
You will see spreads widen during relatively quiet periods and narrow during busy periods. So, although the GBP trades from Sunday evening through to Friday afternoon in the US, opt for specific time periods.
The prime window is when the markets are open in both the UK and the US. Therefore, the best time to day trade the GBP/USD is between 08:00 and 10:00 GMT, plus 12:00 and 15:00 GMT. Here you will find the biggest daily moves and the spreads will have a reduced influence on profit.
So, whatever your technique for identifying support and resistance levels, plus other signals, trading during the most active periods can often yield the greatest profit potential.
Trading Breakouts Strategy
There is ample opportunity to day trade breakouts with the GBP/USD currency pairing. However, you need to look for solid risk-reward ratios. For example, risking 25 pips, but aiming for 100 pips if correct.
Opt for an aggressive 1:4 risk/reward ratio as above, and you can be right far less. On top of that, don’t risk too much capital per trade. Many suggest risking no more than 1-2% of your account balance on a single trade. That way you will protect yourself from losses and ensure you live to fight another forex day.
There is an alternative for those who are less interested in day trading GBP/USD with 15-minute, 1-hour charts, and technical forecasts. Instead, you can trade on today’s news. This page has covered many of the factors that influence the GBP/USD. You just need to stay tuned in and have a plan in place.
For example, economic reports on UK unemployment rate, manufacturing growth, consumer sentiment, and spending, will all trigger movement.
Google Finance, Yahoo Finance, DailyFX, and Bloomberg, all provide live forex news updates. If you can react before the rest of the market, you may be able to assert an edge. They also offer all the GBP/USD rates, forecasts and commentary you need to evaluate your positions.
In addition, whether your strategy revolves around wave counts via Elliot wave analysis, or breakout strategies, getting the latest forecasts, for this week and next week will all put you in a stronger position. Many of the news sources mentioned above provide excellent services to this end.
Long term forecasts can often provide a strategy or at least single trades. Major users of the forex markets are using the same long term forecasts and economic outlook predictions. So governments or major corporations exchanging currency are doing so based on the same price movement expectations. This can often lead to self fulfilling forecasts as those larger trades are either all being held, or all being pushed through.
One word of caution here though, is that as ever, too much reliability is assumed on economic experts. If their predictions were ever properly recorded and tested, they may not be quite as reliable as is assumed.
4-hour GBP/USD Strategy
You will need to view both a 4-hour and daily chart. Both timeframes will be used to make decisions. The daily time frame you will use to identify the main trend. The 4-hour timeframe will be for entering your trades.
You will need two forex indicators:
1. Use a slow stochastic indicator with the following (13, 5, 5) settings applied to both charts.
2. Also, use an exponential moving average 4, EMA 14, and EMA 50 on the 4-hour chart.
- Once the 4 EMA crosses 50 EMA, followed by 14 EMA to the downside on your 4-hour chart, then place a sell trade at market order. Alternatively, place a pending sell stop order on the opening of the new candlestick.
- Enter a stop loss at 50 pips.
- Profit can be taken at 150 pips, which is three times what you risked.
- Once 4 EMA crosses 50 EMA, followed by 14 EMA to the upside on your 4-hour chart, place a buy trade at market order. Alternatively, place a pending buy stop order where the new candlestick opens.
- Again, place a stop loss at 50 pips.
- Profit can be taken at 150 pips.
The benefits of this GBP/USD strategy are obvious. If the trend today is strong you’ll make a decent number of pips. Plus, because you enter the trend on or just after the exponential moving average crossover takes place, you enter as the trend starts and not halfway through.
For more guidance, see our strategy page.
To effectively day trade on the GBP/USD, also known as the ‘cable’ (after the transatlantic cable laid between the two nations), it helps to understand their turbulent relationship.
Trade has existed between the two currencies for so long, there is no way to put forward an original pound dollar exchange rate. It wasn’t until the early 1970s that the concept of the GBP/USD we know today really existed. Change was brought around by the transition to floating exchange rates by both the US and UK.
Before 1971, foreign exchange rate history was tied to the value of gold. This was a result of agreements reached in 1944 at the Bretton Woods Conference. The effects of which, would have implications on the GBP/USD for nearly three decades.
With the demise of Bretton Woods, the GBP/USD conversion history began a more dynamic relationship. The 1980s saw substantial price movement between the pair. These fluctuations can be attributed to several events that occurred in 1985:
- British scientists in the Antarctic uncovered a hole in the ozone layer.
- The first mobile phone call in Britain was made.
- Miners’ ended their strikes.
The effect of all this – GBP/USD sunk from 2.44 to 1.05, the lowest historical exchange rate recorded for the pair.
Understanding why these price movements took place, may help you better understand the forces that influence the GBP/USD, enhancing future investing. So, what went on in the US?
- The 1970s brought with it the rise of Organisation of Petroleum Exporting Countries (OPEC) and oil prices. However, at the same time, a shortage of oil restricted economic output.
- The 1980s kicked off following an extended state of unease in the US economy.
- Following the Vietnam war, unemployment rates were high. This was coupled with the Federal Reserve System (Fed) failing to introduce measures to ease rising inflation.
The impact of the success in Britain and shortcomings in the US was felt in exchange rates. As you can imagine, the GBP strengthened against the US dollar.
Status quo, however, was re-established with the introduction of Reaganomics. One of the key changes was high-interest rates to combat inflation. The tax cuts and military investment that followed, soon saw the US economy booming once again.
The effect of all this on the GBP/USD was significant. By the time 1985 rolled around, the US dollar has risen 50% against leading currencies.
Another important period in the historical GBP/USD relationship came in the early 1990s. The Bank of England’s (BoE) intervention created one of the most significant moves ever witnessed in the pair’s history.
The BoE propped up the value of the sterling in an attempt to maintain the pound’s value against the German Deutschmark as part of the Exchange Rate Mechanism (ERM). The problem was, the UK was in a recession and rising interest rates were an inadequate monetary measure.
It wasn’t long before the likes of George Soros noticed the BoE were in an unattainable position. His response – short the pound.
Black Wednesday came on the 16th September 1992, where Britain left the ERM and abandoned hopes of supporting the pound. In just one day the pound dropped a staggering 25% in value against the dollar.
This all helps emphasise the use historical facts and data can have on future GBP/USD outlook and forecasts.
The next important event in the GBP/USD relationship rolled around in 2008-2009. But before the 2008-2009 global depression, the sub-prime crisis took place. By summer of 2007, it was apparent a number of major US financial institutions were in serious trouble.
However, because the global implications were not yet totally understood, the GBP actually rose against the US dollar for most of 2007, as a result of the apparently flailing US economy. By November 2007, the GBP/USD stood at 2.1163.
Once the BoE fully comprehended the extent of the damage, it started to make significant changes from 2008. The key events in the GBP/USD timeline were as follows:
- 8th October 2008 – BoE cuts its bank rate by 50 basis points to 4.5%.
- 6th November 2008 – BoE cuts the bank rate by an additional 150 basis points, down to 3.0%.
- 4th December 2008 – BoE slashed the bank rate by 100 basis points to 2.0%.
- 8th January 2009 – BoE reduced the bank rate by 50 basis points to 1.5%.
- 5th February 2009 – BoE again cuts the bank rate, by another 50 basis points to 1.5%.
- 5th March 2009 – BoE creates a record low by cutting the bank rate by 50 basis points down to 0.5%, and then announces quantitive easing (QE).
These events demonstrate the potential effects of monetary policy on the strength of a currency. This knowledge could allow you to more accurately forecast and react to future events.
Another significant milestone came with the 2016 Brexit decision. The GBP/USD exchange rates and prices quickly shifted. The value of the pound sunk against the US dollar and other major currencies.
Against the US dollar, the pound fell from $1.466 to $1.3694 when the result was announced, and then dropped to $1.2232 by October 2016, a fall of 16%. Having said that, by the middle of 2017, the pound had somewhat stabilised. Although it is still too early to know the long-term impact on the GBP the decision will have.
Understanding how events are influencing trading on your GBP/USD forex index system will prove useful. Quite simply, whether you are based in the UK, US, Europe, or elsewhere, having the context will make those live trading rates make far more sense.
Role of Great British Pound
Despite the UK’s size, its economy is up there with some of the biggest in the world. As such, it plays an important part in international financial markets and London is considered the capital of the forex world.
In fact, for over a century, the UK was the global powerhouse, with the largest economy. At this time, the British pound was considered the world’s unofficial reserve currency. However, the world wars triggered a relative decline in the UK, whilst the US was blossoming into the world’s most dominant economic power.
Heavy government regulations and restricted labour markets also took its toll on the UK economy. Since then, the economy has stabilised, in part due to the emergence of London as a global financial hub. It also helps that the UK is the second largest producer of oil and gas in Europe after Norway.
What does all this mean for those interested in GBP/USD investing? It means an abundance of trade opportunities every day, in a highly competitive and volatile market.
Role of US Dollar
A fundamental part of GBP/USD trading economics is understanding the crucial role the US dollar plays. It is of great importance for the following reasons:
- It is considered the world’s reserve currency and used to settle a huge portion of international transactions.
- Some smaller countries peg their own currency’s value to that of the US dollar.
- It is the world’s second-largest trading nation after China.
- Huge global banks will hold a substantial percentage of currency reserves in US dollar.
- The live price of gold and other popularly traded commodities are often set in US dollars.
- OPEC conducts transactions in US dollars.
- It is the most prevalent currency in popular pairs.
- The US is a major world player in petroleum, automobile production, aerospace, construction, electronics, telecommunications, plus construction and agricultural machinery.
FX day traders, therefore, need to understand what influences the US economy to be able to forecast in which direction the US dollar will go. Once you understand which factors to take into consideration, you then need to go about keeping abreast of them.
To do that, you should consider the following economic indicators:
- Consumer Price Index
- Producer Price Index
- Trade Balance
- ISM Non-Manufacturing
- ISM Manufacturing
- Federal Reserve Minutes
- Retail Sales
- Industrial Production
- Non-farm payrolls
As two of the most widely traded currencies in the world, the GBP/USD currency pairing attracts day traders from all over the world. Narrow bid-ask spreads and a generous choice of trading vehicles, including futures and options, will continue to reel in aspiring traders.
However, to profit in the crowded forex market you will need to find an edge.Live chart investing is never straightforward. So, day trading during specific periods and utilising volume will allow you to bring meaning to price fluctuations. Using signals and trends will also help you spot promising financial opportunities.
If you can do all that, whilst overcoming the numerous risks, you may be taking the first step to joining the likes of successful forex traders, such as Micheal Marcus and Paul Tudor Jones.
You may also want to see our forex page for further guidance.