The UK and the USA always had a great relationship and similar economic views. Combining the British and American does not come out as great according to certain technical prop traders. The GBP/USD pair has some special characteristics as the third most traded currency pair. Being a very popular trading choice is not a reason for a highlight alone, even some cross pairs such as the AUD/NZD have special price action.
According to our prop trader, GBP/USD has some nuances trend following systems might have trouble with. We will focus our attention on the basic things to know about GBP/USD trading based on some very different opinions by traders, why to pay attention to additional factors on this pair, and certain trading measures.
GBP/USD has a lot of similarities to the EUR/USD currency pair which is the worst pair you can trade described in our previous articles, according to technical traders’ opinion. Beginners should avoid the EUR/USD pair – this is certainly the opposite of what you would otherwise hear on the internet or trading books. If you are not familiar with the contrarian trader view, this is the asset most people are trading and where the big banks intervene frequently. What is even more surprising is some traders just trade this currency pair even if it does not have special advantages, the liquidity or spreads should not be a really important benefit. If we compare the two pairs we can notice they are in the top 3 most traded pairs, and both have the USD counter currency.
The USD is the most manipulated currency yet the GBP is not far behind, it is one of the largest currency trading countries in the world after all. GBP/USD is also more volatile than the EUR/USD. Volatility is not always a bad thing, except for the scalping strategies, trend following strategies need volatility actually. Strategies, as explained in our previous articles, are volatility adaptive, making them universal to any asset. Another key characteristic for both currency pairs is USD driving the bus. In other words, the percentage change in the price or the pair is caused by the USD movements for the most part. Experienced traders know these pairs do not offer much for diversification, it is like trading the USD alone and the USD is the playground of the big banks and news events.
About volatility, the GPB pairs are generally the most volatile if we do not count some exotics. Having a system that adapts your position sizing and protective orders accordingly to the volatility of any pair clears the risks related to it. However, expect bigger moves from GBP/USD than with EUR/USD. Interestingly, GBP/USD is also more sensitive to the news events according to measurements. Since the USD is included, events are frequent. Now, some events are more important and we are not talking just about the impact levels marked on calendars, but about the measurements each event caused the currency to move a lot. The measurements like this are not very popular, they are offered on some statistical websites for a fee, but are easily found.
You may notice if you are trading on a daily timeframe, some events are not meaningful even when regarded as highly important on calendars. As a trader, you will have to adapt your trading plans for the GBP/USD since it has peculiarities. Our technical prop traders avoid news events, so unless you have consistent results from trading the news we recommend avoiding them too, you have no control over how they are going to affect the price. Know that except for the USD, the pound is the most sensitive currency to news events. The reason comes from news aware, educated traders that react.
Since the GBP/USD has this combo of a big mover with news event sensitivity, traders should trade this pair as they would the EUR/USD. It becomes a pair that comes after all other signals. In other words, if you have a signal from your system on EUR/GBP, and GBP/USD, do not split the position risk, trade the EUR/GBP, and ignore GBP/USD. The nature of GBP/USD increases the risk you cannot avoid if you trade it. Our articles cover some of the crosses not involving the USD so you may consult them for specialties on these currency pairs. If a system shows only the signal on GBP/USD, trade it but with reduced position size, as our prop trader recommends.
Brexit poses a special uncertainty for the GBP, consequently also on the GBP/USD. Interestingly, EUR/GBP is still a good choice, but the GBP/USD does not follow the same system-friendly moves. Trends here are choppy, whipsaws often, and unpredictable effects ruin what you might have gained before. The events from Brexit come out of nowhere, a speech or announcements by the banks or political tensions hits the price action line like a stone drop. In 2019 the forex was pretty flat. To some opinions, the Brexit caused some much-needed volatility, allowing for trend following systems to re-engage trading, at least with reduced risk settings.
Nevertheless, caution requires us to follow the events and portals we usually do not have to if you follow our trading strategy example, also pay attention to other markets in the UK and the USA. The Brexit could be over in 2020, however, the effects and lessons from it should remain in the traders’ heads. Every country experiencing any similar long term, eventful turmoil causes the country currency value erratic. Whatsmore, the COVID-19 implications on the GBP are even more severe than in the USA if we look at the economic and pandemic measures.
When we try to make predictions, we are dealing with a very low probability we are correct. Traders that use technical trading systems do not like to predict price movements, especially not in the long term. Investors rely heavily on the fundamental analysis and they commonly make predictions based on the data, yet they react only when the results of Brexit or COVID-19 are clear. Right now the markets have multiple factors – COVID-19, Global trade war tensions and measures, very low maneuverability space left for the central banks, and an economic wave on the decline, signaling another world economic crisis. Markets never had all these very important factors at the same time which is not clearly evident on the charts. At the moment of writing this article, equities are near the record high like nothing is going on.
The selloff on a larger scale in the equities and risk-on currencies are now very easy to trigger, posing a great opportunity for cautious forex traders. GBP is considered a mix between risk-on and risk-off currency, but nowadays a rare choice in a risk-off environment, while the USD is a risk-off currency facing presidential elections and pandemic effect. Some traders think the GBP has priced in for the worst-case Brexit scenario, the one without the agreement with the EU. This means the GBP is about to reverse but the recent COVID-19 events caused uncertainty to the point the price is actually at the right level.
Consequently, the forex market is a bit low on volatility, as well as the equities, as before the storm. The US presidential elections are on the way making 2020 one of the most interesting years for analysis. The EUR has not priced in for Brexit, investors seem not to care about the UK-EU relations and focus on the internal struggles of the Union. The EU is facing serious doubt in the pillars that hold it together, this was especially evident during the COVID-19 pandemic where every country fought for medical supplies over other EU members.
All things considered, technical traders do not make decisions based on these fundamental events but react only when the move on the market actually happens. However, there is an indirect pre-reaction. To conclude, GBP/USD is a more volatile version of the EUR/USD and with more news events, traders adjust their risk management accordingly. On the other hand, GBP cross pairs are great movers with quality trends. Additionally, Brexit and other major factors need to be considered and avoided, trade the GBP/USD only If there is nothing else to trade and do it with half risk. If you test your systems on this particular pair, compare the results with other GBP pairs. Systems that generate good results on EUR/USD and GBP/USD for a longer period could be worth keeping and perfecting.