Currency trading is the most active market in the world.
This is hard to believe given that most people are of the opinion that stocks a.k.a. equities reign supreme. However, Forex trading is the biggest market in the world and its financial headquarters are right here in London, England.
This currency trading market runs 24/7, thanks to the segmentation of the market around the world. For example, between 9 PM and 6 AM GMT, the Sydney market is open for business. Between 11 PM and 8 AM GMT Tokyo opens for trade. London opens at 8 AM and runs through to 5 PM GMT, while New York opens at 1 PM GMT and runs through to 10 PM GMT.
As you can tell, there are periods where there is a significant amount of overlap and other periods where just 1 market operates at a time.
What should you be looking for as a currency trader?
As a currency trader, you will always be looking to trade in the most active sessions. This is where you can expect the most volatility and the highest profit potential.
Volatility is a prerequisite to profitability in currency trading. It explains the sharp fluctuations in intraday trading and it is these highs and lows that determine how much profit or loss one currency will make relative to the other in the pair.
When you look at a typical currency pair such as the GBP/USD pair, you are buying the GBP with USD, or selling the GBP and receiving USD for it. If the current exchange rate of the GBP/USD pair is 1.22, it means that you are paying $1.22 for every £1.00.
If the pair appreciates it means that you will receive more US dollars for every £1. If the pair depreciates, it means that the USD is strengthening, or that the GBP is weakening.
GBP Bounces off 31-year Low…
Brexit continues to dominate the European and UK financial markets. The Brexit (British exit from the European Union) referendum took place on June 23, 2016 and approximately 52% of Britons voted in favour of leaving the European Union.
This had a dramatic effect on the GBP. It plunged to a 31-year low dropping from 1.47 to the greenback to approximately 1.23. The sharp depreciation was not entirely bad news for UK businesses.
When the pound weakens, British exports become relatively cheaper for foreign buyers. They have to pay less of their currency to purchase British goods. However, the flipside of the coin is that imports into the United Kingdom become relatively more expensive.
Trading currency pair is possible in several ways, including straight up forex trading with pips and spreads, CFDs (contracts for difference), and binary options FX trading. All three are speculative trades.
Depending on which part of the current account is stronger (exports or imports), the balance of trade will be affected accordingly. The GBP has been trading at a higher rate of exchange against its partners lately.
The reason for this is the UK High Court decision which prevents PM Theresa May from unilaterally invoking Article 50 of the Lisbon Treaty. She will need Parliamentary approval before the extrication process can be initiated.
A legal challenge with the Supreme Court will need to be mounted, and this has effectively slowed down the move towards a Brexit which has stabilised the GBP.
Trading Advice for the GBP
Various economic data releases have a dramatic effect on the strength of the sterling. When Mark Carney, Governor of the Bank of England announced that he would be staying on until 2018, this brought calm to the financial markets.
The Bank of England is the chief monetary policy resource for asset purchases and interest-rate changes. Presently, the Bank Rate in the UK is 0.25%.
The BOE decided not to alter this rate at its last meeting and this allowed the GBP to remain steady. A rate hike makes it more attractive to invest in the UK.Therefore, additional demand for the GBP comes into play.
A rate cut means that less is earned on fixed-interest-bearing investments. When rates decrease, the GBP weakens relative to other currencies. That’s why it is so important for currency traders to follow financial news headlines.
It’s not necessary to understand the intricate relationships, but a basic understanding works wonders. Consider that approximately $5 trillion is traded in currencies every single day. This figure has plunged from $5.355 trillion per day in April 2013. Nonetheless it eclipses all other markets by a huge margin on a daily basis.