Investing has become increasingly popular over the past decade, especially in the forex market, the largest and most liquid market with trillions of dollars in daily exchanges. The foreign exchange market operates globally and over the counter, providing traders a way to avoid sudden surprises like those in equity markets. Due to its high liquidity, 24/7 availability, and accessibility, forex trading has become a popular career or side hustle for individual traders.
FX trading requires purchasing one currency while selling another, yet the currency pair can be viewed as a single unit that is simultaneously purchased and sold.
Currency pairs are divided into three categories: Major, Minor, and Exotic. Major pairs are the most heavily traded, accounting for 75% of daily trades, and they comprise USD pairs such as GBP/USD and EUR/USD. The narrow spread between bid and ask prices and the low unexpected volatility is what makes this category desirable among traders.
Minor pairs, on the other hand, are not associated with the US dollar and are essentially made up by crossing two other major currencies such as EUR/GBP – GBP/JPY, or by using a major and an emerging market currency. These types of currency pairs are less liquid which can lead to wider spreads, have higher transaction costs, and are very susceptible to manipulation. However, because of their higher volatility, they can present more profit opportunities.
Exotic pairs consist of one major currency and one currency from a smaller or less commonly traded economy, such as USD/TRY and USD/PLN. This pair is not liquid at all, has high volatility, is easily manipulated, has wide spreads, and is extremely sensitive to unexpected political news.
Whether trading forex or any other asset class, the first step towards success is to develop and implement a trading strategy, followed by maintaining trading discipline.
One of the well-known strategies that focus on the GBP/USD is the London Breakout Strategy which takes advantage of the opening range breakout during the London Session. This technique uses the highest and lowest price points reached by the pair during the Asian session, and when the London market opens, the trader enters the trade whenever the asset’s price breaks this range.
The strategy’s success lies when London opens at 7:00 AM GMT and its early volatility. That’s the case with almost all the major financial centers around the world, but more specifically with the London Open and New York Open. The fact that is been used on a major pair means that the trader has lower costs and narrow spreads, so it can easily be profitable.
This strategy has many versions with different targets and timeframes with the most reputable being the trade on a 5-minute GBP/USD chart with traders placing different reward/risk ratios.
Unlike fundamental analysis which attempts to evaluate an asset’s value based on its ability to generate future cash flow, technical analysis is employed by analyzing statistical trends, past market movements and using technical indicators.
City Investment Solutions, a London-based proprietary firm, has estimated that the daily average movement of GBP/USD has been around 84 pips over the past year. Therefore, if there is a significant movement during the Asian session, there is no expectation of a breakout event or the price reaching the take-profit level.
Although the London Breakout technique is straightforward to use, traders shouldn’t become overly comfortable. Is extremely dangerous to use this strategy when macroeconomic news is released. Many traders find it attractive to trade during news releases because they believe is the best way to make a large amount of money quickly. Regretfully, most of the time, it results in needless losses. News about the NFP, CPI, or interest rate decisions from central banks might, among other things, produce extreme volatility and set off your stop loss.
