Characteristics of the currency pair GBP/USD
What is a currency pair?
A currency pair is a trading asset on the Forex exchange consisting of two separate currencies, namely the base and quoted currencies.
In fact, the price chart that you can observe is nothing more than a ratio of the value of these two currencies. First, however, it is worth clarifying that the base currency is the one that is being bought or sold, and it is the first currency in the currency pair, while the quoted currency is what we are trading for.
So, seeing a chart of the GBPUSD currency pair, in front of you is the exchange rate of the British pound against the US dollar.
Types of currency pairs
There are more than two dozen currency pairs. Moreover, every currency unit in the world can be included in a currency pair if the company or liquidity provider wishes. That is why their numbers can be enormous. Nevertheless, in professional circles, there is the following division:
- Cross rates (Minors);
Let's talk about each type in more detail:
Majors are the major currency pairs at Forex, which primarily include the dollar. It is important to note that all majors are based on the following most popular currencies of the world:
- EUR - Euro.
- GBP - GBP.
- USD - American dollar.
- AUD - Australian Dollar.
- NZD - New Zealand Dollar.
- CAD - Canadian Dollar.
- JPY - Japanese Yen.
- CHF - Swiss franc.
Major currency pairs, unlike others, have the highest liquidity due to their demand on financial markets. To put it simply, traders can almost always open a position without any problems, even during a strong supply and demand imbalance, such as after a news release. They also have sufficient volatility to implement any strategy.
We want to draw your attention to the fact that this group of assets, in most cases, has a low spread (close to zero) and no or minimal commission for trading. Also, we should not forget that the Central Bank's interest rates of these currencies tend towards zero, so they are excellent for long-term trading due to a small swap.
2. Cross rates.
This type is a massive group of trading assets. The main feature is the absence of the dollar in the ticker. Thus, examples include symbols like EURCAD, EURCHF, GBPAUD, NZDCAD and many others. It is worth noting that despite the absence of the dollar, its influence on the cross-rates remains enormous. Therefore, news on the world's largest currency will also have to be taken into account.
Minors have sufficient liquidity to be traded successfully. Nevertheless, volatility can vary (from a minor 1.9% change in value per month for EURGBP to 5.5% for CADJPY).
The key disadvantages to working with them are as follows:
- Higher spreads;
- Higher swaps (not all pairs);
- Weakly suited to strategies with small targets (scalping, pips).
3. Exotic Currency Pairs.
This group of trading assets may or may not contain the dollar. Their main feature is low liquidity. The following pairs can be given as an example: USDUAH, USDMXN, USDRUB, EURDDK, EURNOK, USDSGD, etc.
It is essential to understand that these assets are not amenable to any prediction and that spontaneous news or prominent players can easily fall or rise in price. Moreover, as demand is low, spreads and swaps tend to be huge and have minimal liquidity. That is why they are tough to use in practice, and even more, unsuitable for short-term trading.
However, if there are many risks, there is also a chance of getting a score lined up.
It is worth noticing that absolutely any currency pair can make a profit as well as a loss. However, when it comes to majors, they are much easier to trade because the entire trading community revolves around them.
Trading is continuous; at any given time in the world, there is a region in which it is business time, and trading is taking place. What sets Forex apart is that almost all currency pairs (except exotic crosses) are traded continuously, with gaps in quotations only occurring during weekends when markets are closed.
This means that there is always an opportunity to trade no matter what time zone a trader is in. There are some significant differences between the trading sessions, as we will describe later on. It all depends on what strategy the trader is following:
- In long-term trading, the schedule of trading sessions is practically irrelevant as the trades are opened reckoning on rather big movements that develop in several days or even weeks. Accordingly, work is usually done through pending trade orders. If a trader cannot get out of a deal on time due to some reason, the price will not get to a considerable distance anyway. It just will not have enough time.
- For short-term trading and scalping, the schedule of trading sessions is critical. The price can pass, for example, 50 points up during the day, i.e. close above the opening by this value. But during the formation of a daily candle, it can move up and down by 30-40 pips several times, and these moves can be caught, and you can earn on them in intraday trading.
Because these fluctuations are usually related to the opening or closing times of the markets and the release of economic statistics, the schedule of trading sessions according to Moscow time becomes very relevant, and it is recommended to study it or keep it handy for orientation.
Types and characteristics of trading sessions
There are four types of trading sessions on the international market. Considering the peculiarities of each one, the participant has an opportunity to choose the best one, which allows them to trade at the most comfortable pace, increasing the chances for the positive result of the planned exchange operations:
- The Pacific session is quiet, which is why it is the best option for traders who prefer a slower pace of trading. High volatility in this period is noted for the "Kiwi" and "Ozzie". However, the situation during this session is relatively stable without any "surprises".
- The Asian session is also not very active, but in this period, one can make a good profit if the preferred trading instrument for the trader is Yen.
- The European session is active enough to trade successfully in this period at a severe professional level, and attention is required. Therefore, the Euro, the franc, and the pound are the most in-demand.
- The American session - the peak of activity and the period with a high level of risk, respectively, but this period is almost ideal for aggressive trading.
Before you start trading on Forex, you should evaluate your strengths and opportunities and choose the best time to enter the market, considering the peculiarities of the sessions.
Trading time frames
The first thing a trader looking at a chart needs to understand is what period they are looking at and what scale they will trade. For example, if you look at the price fluctuations of the last thirty minutes, you will get the impression that the price is steadily going up. If you then look at the price movements during the day, it is clear that the main direction is down and that the price is just correcting upwards. On the chart during the week, the view may change again. And then again, when you look at the global trend. All this means that the charts should be evaluated on a particular scale, and a time frame is helpful for this purpose.
So, a time frame is the interval of time used to construct the elements of a price chart.
Let's suppose we open a chart of any instrument on the minutes. There will be a lot of oscillations up and down in which, if we look attentively, we will find some signs of direction. Precisely the signs, as the oscillations themselves, will be of comparable size. If we look at the same chart, but only in a five-minute time frame, we will see that there is a direction, and many movements that we saw before will disappear into the candlesticks. If we move on to the one-hour time frame, we will see the trend, and nothing will prevent us from seeing it quickly. However, the scale will be very different, and some strategies will be not applicable. It is, for this reason, there is a division into the following categories:
- Scalping. We are working on a minute and five-minute time frame.
- Short-term trading. Here the candles are 10-30 minutes long.
- Mid-term. Four-hour and daily candlesticks.
- Long-term. Daily, weekly and even monthly.
There is a direct connection between the chart scale and the period used. Some patterns are only seen in a specific timeframe, while others are common to all.
Main types of timeframes
Let's take a look at some of the timeframes:
It is the favourite timeframe of beginners. It is attracted by the fact that fluctuations happen quickly, and therefore transactions do not last long. However, if a broker also has narrow spreads, it isn't easy to convince in the inexpediency of using such a period. Therefore, the only acceptable use of such a dimension of the chart is the specification of market entry on a larger scale because some technical signals can be identified even on a minute chart. At the same time, we must remember that a one-minute period is not suitable for building a trading system, including scalper one, because there is market noise, up to ten points.
The five-minute timeframe is already a relatively informative chart on which you can conduct analysis. Some intraday trading strategies are designed for this period. Five-minute time frames are often used in sideways trading strategies, as it is convenient to follow the trends in short periods, while the one-minute ones are not so suitable. Many traders use M5 just as we said about the minute - to refine the entry. This is often even more successful, as the five-minute chart has more order, and the signals are much more reliable.
This is already a relatively large Timeframe, which allows you to assess trends in the medium term. It usually rarely has candles closed against the trend on a dynamic move, but there can be pretty long shadows that can give the wrong signal. Convenient to use in the case of a news-heavy trading day - many publications occur in the middle of the hour, which is just suitable for a new M30 candle.
One of the main timeframes used in market analysis. It is already large enough to estimate trends not only for a day but also for a week. The corrections of these movements are also clearly visible. As a rule, the chart is quite orderly. However, the candles have a regular shape, which can sometimes be spoiled by publications - in this case, the graph may look like the one described for fifteen minutes.
History of GBP/USD
GBP/USD is one of the oldest and most popular currency pairs on the Forex market. This pair is informally called "The Cable, " which is associated with laying a transatlantic underground cable between North America and Europe to provide an uninterrupted GBP/USD exchange rate exchange. GBP/USD accounts for 17% of the total trading volume in the forex market.
GBP/USD has less liquidity than other currency pairs and is therefore quite volatile. This means that GBP/USD quotes may efficiently react to critical economic data.
Trading GBP/USD: What do I need to know?
The central bank of England, Britain's primary financial regulator, releases monthly data on interest rate changes. Interest rate decision has a direct impact on the exchange rate.
Apart from the Bank of England interest rate, there are other important economic indicators:
- The UK Consumer Price Index: this indicator measures the change in the inflation rate and is one of the leading indicators for the Bank of England when deciding on a critical rate.
- The Bank of England inflation letter: if the rate of inflation changes by more than 1%, the Governor of the Bank of England must send a detailed letter to the UK Chancellor. The inflation letter is often accompanied by a report and the minutes of the Bank of England meetings.
- UK Jobless Claims: This indicator tracks the monthly number of jobless claims and is a good indicator of the overall health of the UK labour market.
- Business activity indices: business activity indices for services, manufacturing and construction are important economic indicators.
The release of US economic statistics also affects the Pound/USD exchange rate. The most important data to watch is the interest rate, GDP, retail sales, business activity index and the consumer price index.
With a practical and straightforward trading platform, fixed spreads, and 24/7 support from UFX, you can confidently trade the pound/dollar currency pair.
How to start trade GBP/USD in Malaysia?
If you want to buy a GBPUSD currency pair, you need to register on the platform of your choice. Registration is a quick and easy process. However, you are required to provide some personal information that will help you to be recognised.
You then have the option to trade on a demo account or open a real account straight away. To open a real account, you need to make a minimum deposit.
As we know, two fundamental factors are the basis of success in stock trading. The first factor is theoretical, as it concerns the field of formulating a trading idea. The second factor is practice-based, as it is responsible for the realization of this idea. So study and trade, and success will not keep you waiting long!