Characteristics of the currency pair GBP/USD
What are currency pairs?
What's for sale on the forex market? Money. Currencies of different countries. We express the value of oil, stocks, futures in currency, but what do we represent the currency's value?
There are two options:
- Compare the value of a currency with that of gold.
- Express the value of one currency in another currency.
Initially, Forex was created for the most profitable exchange of one currency for another. Only later the possibility of speculation appeared. If the market's primary function is an exchange, it is more convenient to express the value of one currency in another.
What is a currency pair? It is two currencies of different states, which are indicated through a slash. For example, USD/RUB is the exchange rate of the dollar expressed in rubles, GBPUSD is the British pound exchange rate in U.S. dollars.
Usually, the first two letters in the currency symbol are an abbreviation of the country's name. The last letter is the name of the currency itself. USD - United States Dollar, GBP - Great Britain Pound, NZD - New Zealand Dollar. There are some exceptions to the general rule. For instance, MXN - Mexican Peso - "peso" is not used in the name.
Another name for a currency pair is Quotation.
The first currency in a pair is called the "quote base", and the second is called the "quote currency".
If we open a GBPUSD (British Pound / U.S. Dollar) pair to go up, we buy British Pounds for American Pounds. If we open down, we sell British pounds to purchase American pounds.
Financial transactions are always done with a quote base.
Under what condition will one currency appreciate against another? The banalest answer is when the other currency starts to fall in value. It is true, but it is a little more complicated than that. The first currency does not just sit and wait for its "rival" to strengthen or weaken. It also fluctuates.
Currency pair designation and currency valuation
Currency pairs in the trading terminal are displayed only in one format, which was formed historically. So, for example, there is a pair USD/GBP, but there is no GBP/USD. So, we see a dollar rate expressed in pounds, but we do not know how much a pound is worth when translated into dollars.
How to calculate? Divide the unit by the available exchange rate. For example, if a dollar is worth £0.72, then a pound is worth $1.38.
How do we arrive at this? By relying on the property of the proportion.
USD/GBP = 0.72. The quotation reflects the value of one unit of the currency. Hence, 1 USD/GBP = 0.72.
Currency pair classifications
1. The first and foremost group are major pairs or "Majors". These are the intersections of the dollar with the currencies of other major nations. The Russian Federation is not among them, despite its geographical vastness.
Quotes containing USD are split into forward and reverse sections. Direct - when the dollar acts as the base (conventionally USD/X). Reverse - when the dollar acts as the quoted currency (X/USD).
There are exactly seven major currencies:
- EUR/USD - Euro/American dollar;
- GBP/USD - British Pound / U.S. Dollar;
- AUD/USD - Australian Dollar / US Dollar;
- NZD/USD - New Zealand Dollar / U.S. Dollar;
- USD/JPY - U.S. Dollar/Japanese Yen;
- USD/CHF - U.S. Dollar/Swiss Franc;
- USD/CAD - U.S. Dollar/Canadian Dollar.
Unfortunately, the other states have not yet been included in the list of "big ones".
A distinctive feature of the major currency pairs - low spreads.
Why are they low? Because they are the most liquid currencies. In other words, a significant number of people buy and sell them. So even with low spreads, brokers make good money on the exchange of major currencies.
2. Cross rates and minor instruments.
Cross rates are currency pairs without the American dollar in them. The most popular of them are singled out into the group of minor instruments. Examples: GBP/CHF, EUR/JPY, CHF/JPY, etc. We will not enumerate them all, as it would take much time.
Traders who work with cross rates choose pairs containing Euro, Japanese Yen or British Pounds. These instruments are often used: NZD/CHF, NZD/CAD, CAD/CHF, AUD/NZD, AUD/CHF, AUD/CAD.
Since the liquidity of these instruments is lower than that of the majors, brokers set larger spreads on minors and other crosses.
3. Exotic instruments.
Exotic currency pairs are the most unpopular financial instruments among traders. They include currencies of developing countries and "third world" countries overlapping with the dollar or with each other.
Countries that are in emerging markets are usually in Exotics or a separate group.
Fewer traders trade Exotics than crosses and minors. This leads to huge spreads.
Additionally, if the country is developing, it is much more difficult to predict its currency fluctuations. Exotic currencies are full of surprises.
Although there are stable trends, for example, the South African rand has fallen in price against the dollar since May 1996, so there is a prospect of making a good profit on a long-term trend.
Trading sessions are specific periods when banks are actively trading. Knowing the schedule of trading sessions is essential for a trader: this increases the ability to distribute working time evenly and use it effectively. It is worth noting that Forex trading sessions operate in a constant regime. When one bank closes in one part of the world, another one opens in the morning, and other banks open, trading continues round-the-clock except Saturdays and Sundays and worldwide holidays.
Forex trading sessions are grouped by location into four major groups:
Each of them has its characteristics and significant differences from the others.
Working hours of the trading sessions
To work successfully on Forex, a trader should consider the time of trading sessions. The session begins at 21.00 GMT from the platform in Wellington, New Zealand. This time is commonly used as a reference point so that there is no confusion when setting the opening times of the session in different regions.
The price at the beginning of the week may be significantly different from Friday's price. This happens when events occur on non-working days that have a significant impact on the movement of currencies. At this time, trading orders are executed more slowly. In addition, the difference between the price at which trades are bought and sold at any given time (spreads) can be significant. You should take these aspects into account when devising your market strategy.
The trader sets the correct time in the work terminal and receives the trading session schedule.
All you have to do is specify your time zone, and the software will reschedule the trading sessions accordingly.
In this way, the trader determines the start of trading and sees the overlap of the sessions on the different exchanges of interest when trading is most active.
The peculiarities of trading sessions of different types should be considered when building a forex trading strategy. Knowing the periods of the highest activity of currency pairs, you can get the maximum profit from transactions and reduce the risk of losses. Install the trading session indicator in your trading platform, and you will not forget to close open positions in time. By using a market timer, you will be able to plan your working hours accordingly.
Trading time frames
A time frame trading period is a timeline for displaying stock quotes (bars, Japanese candlesticks, line graphs).
You can change the time frame in the trading terminal. Classic variants of trading periods are:
- Short term time frames or minute time frames:
M1 (1M) - minute;
M5 (5M) - 5 min;
M15 (15M) - 15 min;
M30 (30M) - 30-minute.
- Medium term time frames or hourly time frames:
H1 (h) - one hour timeframe;
H4 (4h) - 4 hour timeframe.
- Long-term time frames:
D1 (D) - daily time frame(daytime);
W1 (W) - weekly timeframe;
WN (M) - monthly time frame.
Most traders look at the chart in the form of Japanese candlesticks. One candlestick shows the change in stock quotes for the selected period in the timeframe. For example, if H1 is set, then one candlestick contains changes for one hour.
Beginners mistakenly think that a time frame shows the whole chart for the selected period. For example, a daily chart shows the price movement within a day. This is a misconception. The period is the data of one candle.
Choice of time frame depending on trading style
In what time frame is it better to trade? Depending on the trader's goals, the time frame period can be chosen differently.
Traders traditionally start with M15 and even M5. With time the scale is increased to H1, H4, D. But it is only statistics.
It is possible that someone is not trading at all but only investing in the long term. In this case, one should watch only daily and weekly quotes. They should not care about local declines and rallies.
Choose a time frame depending on your trading style
When scalping, we trade on the shortest time frames M1-M5 because the movement taken by the scalper is minimal. Just a couple of percentage points. Most often, this trading principle is used in Forex.
- Day traders.
Intraday trading (intraday trading) takes small intervals from M1 to H1. In some cases, the Day Traders may take a position overnight if they are sure they are correct.
- Short term.
Slightly longer options for short-term investors. The range from H1 to D is used here. The position is held to release a report, some news, or just catch short-term trends for a few days.
- Long term.
As the positions are opened for a long time, the investor does not choose the entry point within one day. No matter how he opens the position, in any case, he expects to earn a lot in the future, so he does not care about the plus or minus percentage within a day.
Long term traders use the highest time frames: D, W, M.
Features of the currency pair GBPUSD
The GBP/USD is one of the most liquid currency pairs on the foreign exchange market. Narrow bid-ask spreads, volume, and volatility contribute to why the GBP/USD pair is so famous for trading. It is one of the most cash-rich currency pairs and the third most traded major currency pair in the world. GBP/USD accounts for 85% of all currency cross trades that occur at any given time.
In the forex market, GBP is the base currency, and USD is the quote currency. This means that the price of GBP/USD at any time is the amount in dollars for which a single British pound can be bought.
Theoretically, you can trade currency pairs 24 hours a day, but there are better times to trade GBP / USD when the currency pair is more volatile. The best time to trade the GBP/USD currency pair is between 06:00 and 16:00 (GMT).
GBP/USD generally exhibits a broader price range than other major currency pairs. This is because this currency pair reacts more impulsively and tends to be very unpredictable, which brings us to its one vital feature - volatility. Therefore, when trading this currency pair, there is a chance to make money, but there is also a risk of losing your deposit.
Factors affecting the GBP/USD exchange rate
There are many factors, which influence both currencies in general and relative to each other in the long term. For example, changes in GDP, employment, interest rates, inflation rates of countries, and political shifts within national economies have a significant impact on the respective currency.
Monetary policy is one of the most critical factors affecting the GBPUSD exchange rate. Therefore, messages from both central banks could be one of the essential factors determining the currency pair's value.
The Bank of England reviews interest rates every month, while the U.S. Federal Reserve reviews rates eight times a year. A factor specific to sterling at the moment is Brexit. The U.K.'s relationship with the E.U., whatever it may be, will have a massive impact for the foreseeable decade.
How to start trade GBP/USD in Nigeria?
There are two ways to trade GBPUSD: either on the countries' stock exchanges that provide access to trade GBP/USD or on the Forex market. The first method can be time-consuming, involves a lot of paperwork and requires significant start-up capital. This is why we recommend choosing a reliable broker and registering online. The registration process is easy and fast.
Opening a demo account
To start trading currency pairs without the risk of losing money, it is best to open a demo account. This is a great chance to try out strategies and experiment without risking your money.
Opening a real account
If you realise that it is time for real trading, you can open a real account. To do so, make a minimum deposit, and you will have access to the full functionality of the trading platform.
Remember: Measure twice, cut once. Then, finally, have a great trading experience!