How to Trade GBP/USD for Beginners
Reading time: 17 minutes
The British pound (GBP) and the US dollar (USD) are two of the most widely traded currencies in the foreign exchange market – often referred to as ‘Forex’ or just ‘FX’. According to the Bank for International Settlements, after the USD, the euro (EUR), and the Japanese yen (JPY), the GBP is the fourth most-traded currency in the world, and GBP/USD is also the fourth most-traded currency pair globally.
The GBP/USD pair represents the exchange rate that indicates the value of GBP in terms of USD at any given moment. It is also liquid – meaning there are always willing buyers and sellers – and often provides sufficient volatility for short-term day traders and longer-term traders alike. This also means that you will be trading with tighter spreads (cost to trade), which can be beneficial for day trading and scalping.
However, it is important to understand that you are trading two currencies, and by extension, two economies. Consequently, to trade GBP/USD, a deep understanding of central bank bias, economic news, and the political situation in both countries, as well as reasonable proficiency in technical analysis, is vital. In fact, I would go so far as to say that without knowledge of these components, you will find it challenging to understand why the pair moves as it does.
What moves the GBP/USD?
Central banks
Central bank policy is the key driver of FX flows. For the GBP/USD currency pair, this means your focus will be on the Bank of England (BoE), which has 9 Monetary Policy Committee voting members, and the Federal Reserve (Fed), which has 12 voting members.
Not only are interest rate decisions crucial to monitor, but so are economists' and market expectations of future policy changes. Additionally, the central bank’s ‘forward guidance’ will be your go-to reference for understanding a central bank’s future intentions and what policymakers are monitoring, as you will need to be watching these data.
While the overall context will need to be taken into account, when a central bank hikes (cuts) rates, it generally boosts (weighs on) the respective currency. If the BoE raises rates, for example, this could underpin the GBP/USD. The divergence between the two central banks' policies is often the single biggest driver of the pair over medium to long-term timeframes.
Economic data
Economic indicators are vital points of interest, generally focussed on economic growth (GDP or Gross Domestic Product), inflation, and employment. Of note, the Fed works with a ‘dual mandate’, balancing maximum employment with stable prices, while the BoE tends to focus just on prices. Therefore, inflation and jobs data will be at the top of your watchlist.
These data can provide trading opportunities when they align with or run counter to the central bank’s bias. For example, if the Fed is expected to raise rates amid higher inflation and the latest inflation data comes in benign, this may mean the Fed could hold off on the next rate hike, which could see the USD sell off.
However, other data – usually referred to as tier-2 – can provide clues for jobs and inflation numbers. Particularly important economic events include Purchasing Managers Indexes (PMIs), specifically the employment and inflation sub-indices, as well as retail sales prints.
Political events
The UK's decision to leave the European Union (Brexit) demonstrated just how political events can move the GBP, with the currency falling by nearly 10% versus the USD in the immediate aftermath. Elections, referendums, trade negotiations, and geopolitical tensions can all create meaningful volatility. As a beginner, it is wise to be especially cautious – or even to stand aside entirely – around major political announcements, as it can muddy the waters considerably.
Market sentiment
My preferred market sentiment measure is the Commitment of Traders report. It is a weekly release largely based on reportable open interest, derived from futures and options data. I track ‘Large Speculators’ and ‘Nonreportable Positions’; ultimately, I look for points where currencies are overstretched and try to factor this into my decision-making.
As you can see from my charts below, GBP futures (2nd chart at the top [red]) show Large Spec bearish positioning. If we have a positive catalyst supporting GBP, this bearish positioning can unwind (traders close out sell positions), providing additional fuel for the upside. You can use positioning to pair off overstretched currencies. For example, if the USD is overstretched to the upside and the GBP to the downside, that bullish catalyst for the GBP can be enough for both GBP sell positions to unwind and USD buy positions to also unwind.
How FX works: The basic mechanics
When you trade GBP/USD, you are simultaneously buying one currency and selling the other; the GBP is the base currency (the one you always buy and sell), and the USD is the quote – the pair is always quoted in this currency. Through your analysis, if you believe the GBP will strengthen against the USD, you would enter long (buy) the GBP and sell (short) the USD. If research highlights weakness in the GBP, you would do the opposite.
For the GBP/USD, the currency pair is priced out to four (sometimes five) decimal places. As of writing, the GBP/USD exchange rate is US1.3616. This means that 1 GBP is valued at approximately US$1.36 (rounded). You will also need to understand what ‘pip’ refers to. For the life of me, I do not know the origin of the term, and could not find it when I started digging around, but it stands for ‘percentage in point’, and is the standard price movement in the Forex market. So, if the GBP/USD rallies from US$1.3616 to US$1.3626, that equates to a 10-pip move.
It is vital to understand that the value of each pip move depends on the position size, measured in ‘lots’. In FX, a standard lot is 100,000 units of GBP, a mini lot is 10,000 units, and a micro lot is 1,000 units. I will not go into too much detail here, but it is very unlikely that you will be trading standard lots as a beginner. You should be targeting smaller position sizes, thereby placing you in the micro-lot category. I would strongly recommend that you research position sizing before trading, as one miscalculation can mean account ruin. Consider part 1 of our 3-part series here, which the Team and I wrote some time ago.
Another point I want to highlight is that it is also recommended to understand the concepts of margin and leverage. The Team and I have given countless presentations on this subject and written several detailed articles on it in our Trading Academy.
Finally, in terms of trading sessions for the GBP/USD, the most active periods are the London session (between 8:00 am and 5:00 pm London) and the New York session (1:00 pm – 10:00 pm). The overlap between these two sessions – approximately 1:00 pm to 5:00 pm – is widely considered the optimal window for trading GBP/USD, as liquidity is highest and price movements tend to be most significant. As a beginner, I would recommend concentrating your trading activity during the London/New York overlap, when market conditions are most favourable.
GBP/USD trading: Basic strategies for beginners
I have been asked more times than I care to remember what the best trading strategy is, which timeframes are best, and how to get started trading Forex pairs. Without knowing the specifics of your personality and your obligations, it would be almost impossible to answer this question. What I can do, however, is provide you with a handful of what I believe are basic trading strategies that newer traders can begin using.
Trend trading
Trend following is usually a good place to start. If you have less time on your hands, trading the longer-term timeframes could be worth exploring, such as the daily and weekly charts. For the GBP/USD, there is a wide selection of methods to trade with the trend; one of the simplest is to focus on trendlines, which I have found to be particularly effective on the GBP/USD.
As shown in the daily chart, I have applied five trendlines, one of which observed price rebound on the second test (black arrow). There were also four opportunities to trade the retest of a breached trendline (orange squares). The takeaway here is that something as simple as a trendline can be applied to trade the trending price action on this pair.
Support and resistance levels
Support and resistance methods are also highly effective when implemented correctly and are often more effective when combined with a macroeconomic backdrop. The macro signal helps explain why GBP or USD is moving the way it is, while technical support and resistance can help determine when to enter and exit the trade.
While I use only two ways to identify support and resistance – Quasimodo levels and opening lines – there are a number of other methods. Beginners could start using big figures; the round numbers, such as US$1.3600, often have unfilled orders that can keep prices at these levels. New traders can also look for entry opportunities when price approaches these levels, combined with confirmation signals from other technical indicators.
Risk management and trading psychology
Many beginner traders focus obsessively on developing a trading strategy. I understand the draw; I was once in that exact same position and focussed my efforts entirely on establishing a strategy, thinking if I could find an edge, the rest would take care of itself. I was wrong. I have said it countless times, without risk management and an understanding of trading psychology, a winning strategy would struggle to generate a healthy bottom line.
The Team has put together several articles detailing risk management strategies, so I will not go into too much detail here other than highlighting that it is generally not recommended to risk more than 1-2% of your trading account on any single trade. If you have a 5,000 USD account, that means your maximum loss on any trade should be 50-100 USD. This might feel small, but it protects you from the inevitable losing streaks that every trader experiences and allows you to continue trading.
Always consider using a stop-loss order (and have a dedicated take-profit zone) set before you execute a trade. This is an instruction to your broker to automatically close your position if the price moves a set amount against you. Without a stop-loss, a single bad trade could wipe out weeks or months of gains. Also think carefully about your risk-to-reward ratio. Aim for trades where your potential profit is at least twice your potential loss – a 1:2 ratio. This means even if you only win 40% of your trades, you can still be profitable over time. Finally, keep a trading journal. Record every trade you take: why you entered, where your stop and target were, what actually happened and, most importantly, detail your emotional state during and after the trade. Reviewing your journal regularly is one of the fastest ways to identify weaknesses and improve your performance.
In terms of trading psychology, while we have a number of articles and webinars from the Team that I would strongly recommend visiting, the key points to work on include: understanding that trading is not about winning and losing, being right or wrong, and acknowledging that fear plays a major role in a trader’s development. Whether you trade FX, stocks, bonds, commodities, or even cryptocurrencies, learning how to control fear will be paramount.
Start trading: A practical checklist
1. Open a demo account with a regulated broker.
2. Study the basics of chart reading and learn to use your trading platform.
3. Choose one simple strategy and stick to it. Master this and then consider other methods.
4. Follow the economic calendar and get familiar with key UK and US data releases.
5. Define your risk management rules before you take a single trade.
6. Trade on a demo account for 8-12 weeks, tracking all results.
7. When consistently profitable on demo, consider opening a small live account and starting with micro lots.
Written by FP Markets Chief Market Analyst Aaron Hill
