Forex series II: How to Trade GBP vs EUR
Imagine if the Euro and the British Pound went to couples therapy. They probably can’t do that because they won’t be able to find a common currency. It has been some time since Brexit happened, but the pound was always the currency of the United Kingdom.
Europe is going through a volatile period. Britain is also navigating through its post-Brexit period. It is a time of constant change in the global environment as well. At such times, currencies like the Euro and the British Pound are interesting picks for traders.
We want to understand how to trade EUR vs GBP and share it with curious traders like yourself. In this write-up, we will look at some of the factors affecting the Euro and the pound. Then, we will cover some forex basics that every forex trader should know.
Traders will be interested to know how they can go about creating strategies to trade EUR vs GBP. So, we will look at how technical indicators can be used to create trading strategies. We will end the article with some words on how to think about risk and manage it.
Without further ado, let’s begin.
Factors Driving EUR and GBP
The Euro is the official currency of the Eurozone, a monetary union made up of 19 countries. The British Pound is the official currency of the United Kingdom. So, factors that affect the values of the EUR and the GBP are similar to factors that affect any other currency.
If you guessed economic indicators and interest rates, then you are right. They are the two most significant factors that drive the values of the EUR and the GBP with respect to other currencies.
Positive economic indicators strengthen the currencies while negative or sub-par levels of economic performance can hit the values of the EUR and the GBP.
A hike in the interest rates by the central bank of a country can also lead to a strengthening of that country’s currency. So, if the Bank of England or the European Central Bank raises interest rates, then the pound or the Euro’s value goes up.
This happens because higher interest rates attract foreign funds seeking to earn higher interest on investments. This increases the demand for a country’s currency and pushes up its value relative to other currencies.
Political stability and trade are also important factors affecting currencies. A weak coalition government or an uncertain political scenario can hit the value of the currency. A large trade deficit or a worse-than-expected trade performance can negatively impact the currency.
The trade aspect is especially significant in the case of the United Kingdom after Brexit. Globally, traders closely track any agreements that the UK closes with other countries and also how the UK’s economic relationship with the Euro region evolves.
Forex Trading Basics
When a currency is bought or sold, it is done with another currency. For example, when you buy the US dollar, you use some other currency to buy it. Similarly, when you sell the US dollar, you get another currency in return.
Forex trading involves a pair. If you buy EUR, you might pay GBP for it. If you sell EUR, you may be looking to get some GBP in return. In the EUR/GBP pair, the first currency (EUR) is the base currency. The second currency (GBP) is the quote currency.
Think of a forex pair as a fraction with a numerator and a denominator. If you are going long that ratio (or going long EUR/GBP in this case), you are effectively betting that the EUR will rise in relation to the GBP. Similarly, if you are going short EUR/GBP, you are expecting the EUR to fall in relation to the GBP.
“In relation to” is the important part here. It can mean that the Euro stays sideways while the GBP falls, or it could mean that the EUR rises faster than GBP even though both currencies rise, or it could mean that EUR rises while GBP stays sideways or falls.
Flip that same logic for the short position. The basic idea is that the ratio of EUR to GBP either goes up or down. If it goes up, going long works. If it goes down, going short works.
Using Indicators To Create Strategies
There are a variety of ways in which you can trade EUR vs GBP. You can either follow a systematic approach where you set some rules and follow them or you can trade with discretion and wait for the right setup.
For example, you can use your technical analysis knowledge to identify support and resistance. You can also try using pivot points to identify significant areas of value. Then, you can either trade a breakout from those areas of values or wait for a reversal and trade such a move.
Some traders like to use moving averages to identify trading opportunities. For example, if different period moving averages converge and turn flat, a large move may be around the corner. If moving average crossovers happen, they could also indicate certain trends.
Indicators like the relative strength index, Bollinger Bands, and MACD can also generate signals to go long or short. The idea is to pick a strategy that you know works for you and that you are comfortable applying with discipline.
There is no magic formula or a one-strategy-fits-all approach. You have to try a few things or backtest strategies if you can and find out what works best for a specific forex pair.
Don’t Forget Your Risk Management Setup
Trading a forex CFD comes with leverage. Any kind of trading activity has its own risk. No trade is a guaranteed winner. Therefore, it is highly recommended that you follow some risk management system to control your losses.
One most common ways of managing risk is setting a stop loss. For this, you will have to know your risk-reward equation and be aware of what is the most that you are willing to lose on a trade.
You may also want to limit the size of your position such that you don’t cross your maximum loss limit in case a trade goes against you.
Trading forex can be quite an experience. Quite a few traders start their careers with forex. The key to forex trading is understanding what drives the currencies and what the price action indicates.
If you are ready to begin trading currencies like the EUR and the GBP, then consider opening an account with Cerus Markets. We will even add our 100% welcome bonus offer to make it worthwhile for you.