The GBP/USD currency pair, also known as Cable, is one of the most volatile pairs in the Forex world. Trading the Cable is challenging; however, if you have a right approach, this pair could bring you huge profits. This article will provide you with tips to trade GBP/USD effectively.
There are plenty of reasons why traders love to take part in the GBP/USD’s daily round. Some of them include:
- High volatility: Trade opportunities appear the most in a volatile environment. The Cable’s price chart is where traders usually find wide price ranges in both short-term and long-term.
- Safety: More than 30% of the volume traded in the Forex market goes through London with the British Pound – Greenback accounting for 14% of the total daily trading volume. This ensures that there is always a range of opportunities available for the GBP/USD participants.
- Availability of resources: Finding price information and data on the GBP/USD is at traders’ fingertips because the UK and US are two of the world’s most modern economies.
With that said, trading Cable also has some drawbacks. High volatility may go with rapid movements sometimes, and it means you can lose money in the blink of an eye. Besides, a large number of economic reports coming out on a regular basis also make it difficult for day traders to grab profits from short-term movements.
GBP/USD Trading Tips
To make your trading work for you, we need to have a top-down approach. Let’s consider the fundamentals first and foremost because they are what influences Cable’s movements.
Below are the main drivers that you should put in your watch list:
- Economic strength: The strength of an economy is measured through various economic data – unemployment rate, GDP growth rate, Consumer Price Index (CPI), etc. Cable normally advances if the UK economy looks stronger than the US, and vice versa.
- Monetary policy: Decisions of the Bank of England (BoE) and the Federal Reserve (Fed) also influence the GBP/USD exchange rate. Higher borrowing costs or a hawkish rhetoric can drive a currency up, while lower borrowing costs or a dovish rhetoric normally push a currency down.
- Political events: Cable’s movements are also affected by political events. Brexit is an example.
The Best Time to Trade the GBP/USD
The Forex market is open 24 hours on 5 business days, but it doesn’t mean that you need to stare at the trading platform all day to collect GBP/USD trade opportunities. Instead, try to limit your trading time to 4 or 5 hours a day. The best time to ride the Cable horse is between 08:00 and 10:00 GMT, or 12:00 and 15:00 GMT. Normally these are the durations when big movements appear and the spread decreases to the minimum.
Effective Field-Tested Strategies For the GBP/USD
1) Trading the Breakouts
Breakouts Trading is a very popular strategy in the Forex sphere. The basic recipe of this strategy is: when pre-defined support or resistance thresholds are broken with volume increased significantly, you should jump into the market towards the breakout’s direction.
When becoming a breakouts catcher, you need to pay attention to risk-reward ratios. Any signals with a risk-reward ratio below 1:2 should be ignored. That means if you risk 20 pips, aim for a reward of at least 40 pips.
How much money you risk per trade is also an important factor. We suggest that you shouldn’t risk more than 2% of your account balance on a single trade.
2) Trading News
The news trading strategy is also effective for GBP/USD traders. As a new trader, you need to track all high-impact economic announcements of the US and the UK. You should use online economic calendars to do so. Besides, it’s a good idea to track live FX news updates on sites like Google Finance or Bloomberg.
The Bottom Line
The Pound/Dollar is one of the most liquid currency pairs in the FX world. High volatility brings market participants many opportunities, but also high risks. As a GBP/USD trader, you should pay close attention to the fundamentals influencing the Cable’s rate, and build for yourself an effective trading plan. Don’t try to trade this pair all the time; instead, choose your trading time wisely.