Forex Analysis

Trading the GBP – Tips for Now (and Later)

Trading the GBP - Tips for Now (and Later)

By: DailyForex.com

At the time of writing, British Pound has been one of the more active and trending of all the major currencies over recent weeks. In any case, it is a perennial favorite of retail traders, and it is mostly traded against the USD as GBP/USD (“cable”), but also against the JPY as GBP/JPY (“geppy” or “the beast”) and of course against the EUR as EUR/GBP.

The GBP can be a great currency to trade for profit as in many ways it is the most predictable of all the major currencies. However these areas of predictability are often misunderstood and traders can find themselves being stopped out for losses thanks to unexpected spikes, swinging volatility, and generally slippery price action. In this article I am going to highlight a few points that should help you avoid some of losses if you digest them and keep them in mind.

Time of Day

This might not be shocking news, but the price movement in the British Pound is heavily dominated by the time of day, i.e. what happens between 8am and 5pm London time. London is one of the major global trading centers anyway, although over recent years the New York session has become more influential in shifting price direction. However when it comes to the British Pound, the London session is so influential that there is little point in opening trades outside the London session. You can also expect the crucial high (in a down day) or low (in an up day) to be made during the London session.

A few weeks ago I analyzed a trading strategy that sought to trade the GBP/USD by just watching where the price is at 9am London time. If it is up by more than 0.15% but less than 0.30% since Midnight, look for long trades, and vice versa for shorts. With the exception of really wild and crazy market environments, the strategy has worked quite well. So it can be said that there is a statistical directional bias that is set by the first hour of the London session, from 8am to 9am London time.

If you are trading the GBP/USD currency pair, the time of the Tokyo/London overlap when both centers are open can be a really wild ride. This can be a great time to just try to ride the swings as they turn.

Trading the EUR/GBP currency pair is usually less wild and of course the action here is also heavily centered on London hours.

Trends and Ranges

The British economy is heavily integrated with the Eurozone, and also to a large extent with the economy of the U.S.A. This means that over recent years, the currency has tended to not move very far against either the Euro or the U.S. Dollar. Therefore, trend trading these pairs can be hard to do in a profitable way. It is often better to take the lion’s share of profit fairly quickly. Especially regarding the GBP/USD, the pair really tends to range a lot, meaning buying reversals at lows and selling at highs and just holding on until momentum runs out can be a great way to trade.

Stop Losses, Volatility & Momentum

The British Pound is a major global currency but is nowhere near as liquid as the giants like the USD and EUR. This means that it can move very fast and change direction very quickly, as liquidity gets squeezed heavily during times of news or sudden interest in the currency. This means that unlike a pair such as the EUR/USD, if its taking off it is often going all the way very soon! It rarely “plods” along, but has a speedy, zippy personality.

For these reasons and others, support and resistance levels often are respected after being violated by quite a few pips. Levels are far more slippery and so for this reason it is often wise to use wide stops if entering in front of a falling knife.

Trend lines can be relatively unreliable compared to other currency pairs. However breakouts from consolidating triangles can work really well.

Conclusion

The British Pound is one of the more predictable global currencies. Its spread is relatively low and retail traders can make money out of it more easily than is generally realized, provided allowances are made for the tendencies that I have highlighted within this article.

 News Source:http://www.dailyforex.com/

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Yan

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