The sterling pound has been in free fall against the US dollar over the past year, hitting record lows at the start of the week, prompting panic over social media. Most users of social platforms have shared defeatist memes as concerns for higher inflation grow. According to Barry Eichengreen, a professor of economics at the University of California, a plummeting pound means the UK faces an “even more severe cost-of-living crisis” given that there isn’t hope for recovery anytime soon.
The pound’s downward trajectory against the dollar didn’t start the other day, as has been the case since 2016 when Britain voted to exit the European Union. With GBP continuing its sluggish trend, traders can’t help but wonder if there is a way they can take advantage of the situation. This piece will focus on how traders can take advantage of the falling pound and offer forex money management tips while you are at it.
Trading GBP/USD
There are two ways to profit from trading GBP/USD: longing or shorting the market. The former involves taking a long position expecting the market to rise, and the latter involves taking a short position expecting the market to drop. If your prediction is right, you get to profit; otherwise, you lose your capital. To accurately predict what direction the market will move, you need to understand the forces that drive it. There is a fundamental analysis where you will study factors that drive the price of GBP vs. USD, such as the economy of both nations, Bank of England policies, politics, and government and economic data all of which cause volatility between the pair. Then there is technical analysis, where you will study charts and draw trendlines to establish a trend. Also, you will make use of indicators to support your bias.
Paying attention to the news can also aid your trading. Many short-term traders prefer to day trade the pair based on high-impact news announcements to capture the volatility the news might provide. The same applies to long-term traders who will track news announcements that have the potential to impact trading GBP/USD to identify any trends in good or bad economic data.
Most brokers will have news integrated on their platforms that can be accessed easily and filtered to cater to only the markets that interest you.
Tips On How To Trade GBP/USD Successfully
To succeed as a trader, you need a set of rules to follow that will help you manage your money effectively, minimize losses, maximize your profits and grow your trading account. The main objective is to protect your capital by cutting your losses and maximizing gains. Below are a few tips that will serve you well as you trade GBP/USD.
The first is trading what you can afford to lose. This is the golden rule in trading. There are no guarantees in forex trading as is the case in life; therefore, you want to commit money you are comfortable losing. These means don’t trade your rent, food, or other bills money. Also, consider setting a maximum acceptable loss per month target if you get there you stop trading until the next month.
The second is determining how much you would like to risk per trade. If you are getting started, consider risking 1% of your account for each trade. For a $10,000 account, you will risk only $100 per trade. The good thing with this is you minimize the chances of getting wiped out if things don’t go your way.
The third is determining your risk-reward ratio. If you opt for 1:1 it means for every $50 you risk you earn $50. Nothing wrong with this; however, if you win two and lose two, you will have no profits. Ideally, you want to win more than you are risking; therefore, a ratio of 1:2 or 1:3 is good. That way, even if you win a bunch and lose a few, you are still in profit.
Other things to pay attention to include the leverage you choose to use and to withdraw profits. For leverage, it allows you to open larger positions than possible with less capital. It can lead to big gains; however, big losses if things don’t go your way. Therefore choosing healthy leverage is ideal. And most importantly when you win remember to withdraw some of your profits. Don’t feel guilty or greedy, as you might end up losing it all in the name of growing the account.
