The UK interest rate is currently 0.75%. The BOE’s MPC voted in a 7/2 decision to hold the bank rate at its current level when it met in October 2019. The Bank of England has pursued a policy of economic stabilisation with the dual objectives of full employment and 2% inflation. With interest rates at their current level since 2018, there is little to be gained from investing hard-earned money in fixed-interest-bearing accounts with leading high street banks such as HSBC, Lloyds TSB, the Bank of Scotland, and the like.
With the UK’s quantitative easing programme still in effect, £435 billion is being injected into the economy to stimulate economic growth and ease the dangers presented by the Brexit debacle. With the recent victory of Prime Minister Boris Johnson and the Conservatives, Brexit proceedings are on track for expedited processing. It is against this backdrop that we explore top tips for being a successful trader in the United Kingdom.
#1 – Follow economic indicators
The UK interest rate is subject to decisions made by the 9-member Monetary Policy Committee, otherwise known as the MPC. Interest-rate increases tend to reflect a booming economy where the Bank of England is attempting to curtail a potential overheating of the economy. By raising interest rates, more money is removed from the system and invested in banks and fixed-interest-bearing accounts. By reducing the money supply, its value increases because it is more expensive to access funding through long-term loans, and short-term loans.
This is designed to safeguard against overheating when too much money is chasing too few goods. The MPC votes are important insofar as they have a direct bearing on what happens in the financial markets. Unanimous decisions tend to build more confidence, while split decisions tend to erode confidence. Other economic indicators include GDP growth rate, unemployment rate, inflation rate, interest rate, the balance of trade, business confidence, manufacturing PMI, services PMI, and retail sales among others.
#2 – Geopolitical sentiment
Geopolitics is an important determinant of global financial activity. Simply put, geopolitics refers to what happens between countries which have an impact on trade. War, sanctions, tariffs, blunder and bluster, and political shenanigans have an outsised impact on financial markets. The Brexit debacle is the perfect example of geopolitics at work. In the run-up to the June 23, 2016, Brexit referendum, markets and market players were fraught with concern, leading the pound into oblivion.
The recent UK Parliamentary elections gave a thunderous vote of confidence to Boris Johnson and the Tories, helping to drive up confidence in the UK economy by way of a strong majority in the House of Commons. Now, Brexit proceedings will not be hamstrung by fierce opposition from Labour – they will pass. This has a positive impact on trading activity, particularly with top FTSE 100 index listed companies. A positive outlook in the political arena is inherently bullish for financial markets and trading activity.
#3 – The GBP
The Queen’s currency – the GBP is an important component of overall trading activity in the United Kingdom. GBP strength or weakness determines the country’s ability to pay for imports, generate returns off exports, and attract foreign direct investment. As a case in point, the GBP USD collapsed to 1.18 (there and thereabouts) in the aftermath of the Brexit debacle, but has bounced back after the recent general elections. As a trader or investor, GBP is now fully bullish. This means that holdings in GBP are worth substantially more in USD terms.
An investment in real estate worth £1 million may have been worth $1,280,000 midway through 2019, but heading into 2020 that same investment may be worth $1,350,000. Minor movements of the needle have an outsised impact on large-scale activity, notably premium value investments in stocks, bonds, commodities, and currency pairs. A resurgent GBP bodes well for imports but harms UK exports since it makes UK-produced products more expensive to foreign buyers. Ultimately, equilibrium must return to the market – but over the short-term substantial profits tend to be made in the trading arena.
#4 – Trading traditional and contrarian options
When you trade online, you have access to a unique variety of options in the financial markets. These include traditional trading methods where you buy a stock, commodity, ETF or mutual fund and wait for it to appreciate over time to generate a higher return. Other options include contracts for difference where derivatives trading is used. In this method of trading, the trader does not purchase the underlying asset – the trader purchases a contract for delivery at a future date. The pricing of the CFD mirrors the underlying performance of the financial instrument. CFDs are traded with brokerages. If markets move in your favour, you finish in the money.
If markets move against you, you finish out of the money. Other options include futures contracts which are generally traded on stock exchanges. The difference between the two is that there are much lower entry requirements for trading CFDs than there are for futures contracts, meaning that the mass-market can enter these types of trades with relative ease. It’s important to know the difference between CFD trading and futures contracts. Leverage is available in both types of options. With these trading options, the holder of the contract has the right to buy/sell the asset at a fixed price at a specific point in the future.
#5 – Understand what spreads are all about
In trading parlance, a spread is the difference between the bid price and the asking price. This typically relates to currency trading such as GBP USD. If this currency pair is trading at 1.3351 and 1.3356, there is a spread of 5 pips. To benefit from trading this currency pair, you would need this currency pair to move in your favour to the tune of 5 pips +. After that point, you will start generating a profit when you trade this currency pair. When you purchase a currency pair, you will make an initial loss of 5 pips based on the difference between the higher price that you paid and the market price. This is invariably the commission that the brokerage enjoys on trading activity.