Trading Currencies – “The Cable”
In the currency market, the GBP/USD pair – also known as the cable – is the third most traded pair after EUR/USD and USD/JPY. There are a number of reasons behind this. One, Britain and United States are some of the oldest modern economies in the world. Second, the two countries represent a large extent of safety which is very important among the investors. Third, there is a lot of liquidity and volatility in the pair. Abundant liquidity makes it possible for traders to enter and exit the market with ease. Fourth, getting information on the two countries is relatively easy compared to other countries such as China. In this article, I will highlight five key tips that will help you make better trades with this pair. Before this, I will answer one of the most common question about Trading Currencies and the pair on why it is known as the cable. It is known as the cable because of first transatlantic cable that was laid from the United States to UK for communication purposes. Currency quotes were some of the key pieces of information transmitted through the system.
#1 – Understand the Two Economies
To be successfully in Trading Currencies, and especially trade the cable, the most important thing you need to do is to understand the two economies and how they work. Without a detailed understanding of how the US and the UK economy work, you will not be able to make proper trading decisions. You need to understand how the two countries trade. Understand their trade balance. You also need to understand how the two countries relate with the outside world. Also, understand their monetary and fiscal policy, and their politics.
The United States is the main destination for United Kingdom’s products which include: cars, medical supplies and turbines among others. The UK’s trade balance is shown below.
UK Trading Balance
#2 – Trading Hours
When trading the GBPUSD pair, timing is very important. There are two times when the volumes of the trade are optimum. This happens at the intersection of the European and Asian markets (3 am and 4 am EDT), and the intersection between the European and the American markets. Most orders are placed during this time. Traditionally, the Asian session is marred with low volatility. Major breakouts happen after the European markets open. In addition, major economic data affecting the two currencies is released during the European and American sessions. Therefore, it is very important to understand
#3 – Understand the politics
United States and United Kingdom have similar political behaviors. They are open democratic countries. They are also part of similar political and economic blocks such as the NATO, OECD, and G20. To be successful in trading this pair, it is very important to understand the dynamics of these affiliations affect the currency movements. For instance, when there is a G20 or G10 meeting, you should understand how the discussions will impact the currency pairs. Also, we are now nearing a referendum that will determine if the UK will remain part of the Euro or not. Recent statistics indicate that there are chances that the Brexit could happen. If this happens, I expect that the pound will fall. In the past, when pro-Brexit polls are released, the pair goes down. Also, we are nearing the United States polls. You should understand how the pairs will move when either Trump or Clinton gets the ticket.
#2 – Correlation and Technical Analysis
GBPUSD is one of the best pairs to trade with using technical analysis. This has however slowed in the last couple of months as a result of the Brexit issue. Ordinarily, most technical traders prefer to use the pair because of the way it responds to key indicators. Correlation is another reason why many traders use this pair. Correlation analysis is an important tool to determine which pairs to trade with based on their movements. For instance, the correlational co-efficient of GBPUSD and EURUSD is usually close to 1. This means that the pairs move almost in a similar manner because of the similarities in the base currencies. For instance, if GBPUSD moves up, chances of EURUSD moving up are high. Therefore, it is easy to hedge the two pairs and minimize the risks involved.
Trading Currencies – Useful Links
- Read the Top 7 Question about Trading Currencies on Investopedia
- Discover more about Trading Currencies on XE
- Is Currency Trading Worth the Risk? Find it on WSJ