What is GBP/USD Forex Trading?
GBP/USD forex trading is the process of using the latter to buy the former. In other words, you’re trading USD for GBP or, more specifically, establishing the value of GBP against the USD. Why? Well, because the value of both currencies is always changing, your goal is to trade at a better rate than when you started. The way GBP/USD forex trading works is that you can take either side of the coin.
What we mean by this is that you can trade against the value of this currency pair increasing or decreasing. That’s important because it means you’re not always rooting for the value of GBP to increase compared to USD. If you complete a “buy” order (more on this later), you want its value to improve. However, if you complete a “sell” order, you want the value to decrease.
Whenever you’re trading forex, the aim is to compare one currency’s value against another. As we’ve said, in this instance, GBP/USD refers to the value of the GBP in relation to the USD. To get technical for a moment, we’re comparing the “base currency” (GBP) to the “quote currency” (USD). Traders and financial experts have been comparing the value of the GBP to the USD for centuries.
In fact, GBP/USD is one of the most active forex trading markets in the world. Prior to the advent of official forex markets, the GBP and USD were intimately linked because of the close political and economic ties between Britain and the US. In the 1800s, £1 was worth approximately $5. However, as the US grew and its currency gained in strength, the relative values changed. Indeed, when the Bretton-Woods system tied the value of the USD to the price of gold, the exchange rate was £1/$4.03.
When the Bretton-Woods system collapsed in the 1970s, the US dropped the “gold standard” and the USD became free-floating, as did the GBP. The GBP/USD exchange rate has gradually changed over time. From a rate of £1/$2 in the 1990s, it now hovers around the £1/$1.40 mark. You can check out the live GBP/USD forex trading price in the section below.
Live Chart GBP/USD
The History of GBP/USD
We now know that GBP and USD have been linked, compared, and exchanged for decades. You can go online and find GBP/USD forex trading data from 2000. This is when it started to gain traction and become one of the most traded currency pairs in the world. In 2000, the average daily trading volume was $93 billion. Today, around $330 billion worth of GBP/USD is traded on a daily basis.
This is one of the main reasons to trade GBP/USD. A large daily volume means there’s high liquidity within the market. The benefit of this is that orders will not only be fulfilled but executed in fractions of a second. This isn’t always the case with other currency pairs. The time it takes to complete an order at our recommended FX sites depends on how active the market is.
If there aren’t many people buying and selling a currency, there can be a delay between the time you submit an order and it being completed. That’s a problem because the price can change during this delay and that can cause you to lose money. High-liquidity markets such as GBP/USD don’t suffer from these delays.
Another benefit to high-liquidity markets is that they aren’t as volatile as others. The average volatility of the GBP/USD is 0.95%. That means the price fluctuates less than 1%. Lesser traded currencies may fluctuate more, which makes it harder to predict what’s going to happen.
Naturally, this doesn’t mean it’s easy to know how the value of GBP/USD will change. However, using all the data available, it is possible to get an idea of just how much the price could move based on the average volatility.
Factors that Influence the GBP/USD
The GBP/USD forex trading market can be affected by multiple factors and events. Because Britain and the US are international allies, political, social, and economic events on both sides of the Atlantic will affect the financial markets. For example, if traders view the incoming US President as bad for businesses or the economy, this can affect the GBP/USD trading price. Similarly, if traders aren’t keen on the Prime Minister, prices can also shift.
Britain and the US also act in unison when it comes to certain global events. For example, the Iraq war saw both countries join forces. Therefore, it’s not just events within the two countries that can affect the GBP/USD. If Britain and the US have the same response to a political event elsewhere in the world, that too can impact the value of GBP/USD.
The Role of the GBP
The GBP is the official currency of Great Britain. It was first introduced during Anglo-Saxon times and decimalised in 1971. Today, GBP is the fourth most traded currency in the world, and it stands as a monetary marker against which the economic performance of Britain is measured.
This means its value is affected by employment rates, political changes, legal changes, monetary policies, economic output, and more. In simple terms, the GBP is both a method for exchanging value (i.e. paying for something and trading) and a reflection of economic strength.
The Role of the USD
The USD became the official currency of the United States in 1792. Since then it has been the monetary unit of all US states. Like the GBP, the USD is both a unit of value exchange and a reflection of economic strength. Because of this, its role and therefore, its value, is tied up with a myriad of political and socio economic processes, including:
- National debt.
- The Federal Reserve’s fiscal and monetary policies.
- Political events.
- National unemployment rates.
- International trade agreements and tariffs.
- Medical and social security issues.
Every GBP/USD forex trading strategy should focus on two things: cost and risk. Why? Because they are inextricably linked. The more you stake, the greater the risk. The more risk you want to take, the more you have to stake. Therefore, you have to look at every move from these two angles.
As we’ll explain below, you need to focus on various subjective and objective variables when it comes to buying and selling GBP/USD. However, as a general strategy, you need to ensure that your investment doesn’t involve too much risk.
For example, if you have £500 in your trading account, you wouldn’t open a £100 position with 5X leverage. The potential downside of this trade is far too great. In other words, a bad run could wipe out your bankroll within minutes. That means you need to tailor your trades to suit your bankroll – so, only invest a small percentage of your capital on a single trade. What’s more, don’t use too much leverage because it can amplify your losses. Be conservative at all times, that’s the bottom line.
When to Buy or Sell GBP/USD
Knowing when to buy and sell GBP/USD is as much of an art as it is a skill. You can never know for certain when the “best” time to make a move is. However, you can give yourself the best chance of getting it right by looking at the following metrics:
- Recent political events such as elections, trade deals, trade wars, and social unrest.
- The current price of GBP/USD vs. the currency pair’s historical price.
- Economic policies that can affect GDP; employment, interest rates, trading relations, and more.
- Data analysis, including technical indicators, price movements and trends, resistance points, and support levels.
How to Trade GBP/USD
You can create an account with one of our recommended forex trading sites and speculate on GBP/USD by completing these steps:
- Make a deposit.
- Download a forex trading platform e.g. MetaTrader 4/MetaTrader 5.
- Search for GBP/USD.
- Check the bid and the ask price.1
- Choose to go long or short.2
1. The bid price refers to the price at which traders are selling GBP/USD. The ask price refers to the price traders can buy GBP/USD.
2. Going long means you’ll make a profit if the value of this currency pair increases. Going short means you’ll make a profit if the value of this currency pair decreases.
GBP/USD forex trading also involves two additional variables known as the spread and leverage:
This is the difference between the bid price and the ask price. You can look at this as the cost of trading GBP/USD.
Standard forex lots are equal to 100,000 units of the base currency. This is a lot of money and beyond the reach of most traders. Therefore, to get full exposure to the forex market, the best online FX brokers offer leverage. This multiplies your stake by a certain amount so that you can take a standard position within the forex market.
How to Profit from GBP/USD
You’ll make a profit when you trade GBP/USD if one of the following happens:
If the bid price goes above the ask price, that means the value of the GBP has increased. So, if you’ve taken a long position on GBP/USD, you’ll make a profit.
If the ask price is higher than the bid price, that means the value of the GBP has decreased. So, if you’ve taken a short position on GBP/USD, you’ll make a profit.
Closing Your Position: Taking a Profit and Cutting Losses
You have two choices when you use the top forex trading sites. You can choose to close positions manually at a point you believe is correct. Alternatively, you can use auto-close features (take profit and stop loss) to end trades once your profit/loss reaches a predefined point.
We can’t tell you when the right time to close a trade is, but you should set a loss limit that fits with the level of risk you’re willing to accept. Similarly, you should take a certain amount of profit that matches your level of risk. Just know that the price of all currency pairs can rise and fall significantly in a short space of time. Therefore, you need to have a set plan and stick to it.
Choosing a Forex Broker
We’ve reviewed the leading online forex broker sites. Our experts look at everything an operator offers to ensure you get a comprehensive, honest, and fair overview. This allows you to assess and compare things such as spreads, fees, leverage, promotions, trading software, and more. Once you’ve found a broker or two that takes your fancy, you can use our registration links to join.
From there, you can use a free forex trading account to get a feel for the software and how the markets work. You can also make use of our training material and tutorials offered by the broker. Then, once you’re ready, you can make a deposit and start trading GBP/USD.
The Risks of Trading GBP/USD
GBP/USD forex trading comes with a number of inherent risks. You can never eliminate all risk from trading because it is simply inherent. However, you can try to minimise risk at every opportunity.
One way to do this is to identify things that could impact your investment. When it comes to GBP/USD forex trading, here are three potential risks you need to consider:
Your investment should be a very small percentage of your overall bankroll. As a general rule, a single trade shouldn’t exceed 5% of the funds you have available for trading.
Anything that could upset the status quo can impact the value of a currency. This could be political unrest, economic instability, or something else that changes the balance of power.
Leverage helps you get full market exposure and larger profits if a trade goes your way. However, leverage can also amplify your losses when a trade doesn’t go your way. Therefore, leverage can be risky and must be considered carefully.
Conclusion GBP/USD Online
If you’re interested in trading forex online, GBP/USD is a great currency pair to focus on. It is a high-liquidity market that’s available at every major FX site.
Add to this the relationship between Britain and the US, the ease at which you can get data on both currencies, and the various promos available online, and there’s no doubt that it’s a great pair to trade.