London Breakout Strategy
Online trading can be a very profitable business but if you dive into the markets without a proper plan by your side, you are in for a bumpy ride. Most newbie traders fail and lose almost all their initial investments and one of the biggest reasons is that they do not have a good plan and strategy in hand.
One of the most popular trading strategies is the London Breakout Strategy. Today we will be looking at what is the London breakout strategy a nd why it should be used. We will take a look at how it works as well.
London Daybreak Strategy Review
Let’s get the basic stuff out of the way first. London breakout strategy, also known as the London daybreak strategy by retail traders, is a strategy which allows the traders to take advantage of the trading session which opens before the other big trading markets. Since London is in a different time zone, the markets open a few hours before the ones in New York. Theis allows the traders to take on trading positions before the other markets open.
The strategy involves simply taking on a long or a short position in the London trading market as soon as the market open there. The real advantage lies in the time the London market opens. So, what time does the London market open? The London trading session open at 7:00 A.M, which gives traders a considerable amount of time before the US trading session starts at around noon.
Taking advantage of this trading session lies in the fact that there is a massive trading volume for currency trading during this session. This means there is a big chance that the trend for GBP/USD during this session is will remain the same for the rest of the London forex session. It can also be carried over to the US trading session which starts a few hours later.
Why the London Open Breakout Strategy works?
By now we know what the strategy is, we should take a look at WHY this famous London open forex trading strategy actually works.
When the London markets open early morning, there is a lot of volatility as expected. The same is case with any other financial market when the trading session first opens, specifically the London open and New York open, as these two see the most forex trading volumes in the world.
As most of the currency trading takes place from the banks, these institutions try their best to accommodate their corporate clients. The timing is also perfect as banks and other financial institutions start their day at the same time London opens its trading markets. As a result of this trading volume, London open and New York open see the most volatility. This makes this time the prime window towards good trading opportunities because volatility is analogous to opportunities in the trading world.
As this session sees the most volume, most of the trading activity will be compressed in this time frame and if the London open comes out of the opening range breakout, the market will most likely not give you a second shot at it. This makes this a powerful strategy. It is advised to keep an eye out for the first hour as soon as the London session time starts.
A valid question from the traders can that what are the best currency pairs to trade during London open session. The answer to this is that all the majors like EUR/USD, USD/JPY and AUD/USD are good candidates to trade using the London open strategy but during the opening golden hours, GBP/USD will dish out the most profit because of the high liquidity as banks and other institutions are opening for the day which results in high volatility.
When to use the London Daybreak Strategy
During the opening hours of the London stock market, there is an ideal time frame which can prove to be the most beneficial for traders. One hour before the actual open of the market and one hour after the market opens. This two-hour window is the best time to use your strategical knowledge to your advantage.
Many expert traders say that the hour before the opening of the market is more relevant as compared to the one after the opening, as most of the volatility starts 30 minutes before the opening of the stock market.
The actual steps involved in the trading session are explained below:
- Finding the London Trading Range
- Looking for the Breakout Trade
- Fading in the London Open Breakout
- Ride the Trend and Take Profits
Use the candlestick chart and define your trading range. This is done by looking at the highs and lows of the candlesticks in the Asian Trading Session. These levels will define your breakout point.
The markets will really start to take off an hour before the opening and we are looking to trade this market momentum. One interesting thing here is that more often than not, we will not have to guess where will the market will go but the market will show us the way itself. Once the market starts to move on one direction or the other, it will continue to do so and its one-sided momentum will become very clear.
When the London session opens, we want to immediately see the price fading the pre-open move. If we indeed see the fading, we will know that it was a false breakout caused by the smart money. This happened because the momentum behind the false breakout was same as the momentum for the pre-open move. Once this process is completed, we will see a V-shape in the price formation (Or an inverted V). Five minutes after this price shift, we enter our trade.
After you have entered the trade and seen the trend of the price formation, you can utilize various trading methods to make your profit target. You can use the Asian Trading Range and project that on out own range or you can use a trailing stop. The choice here will be determined by the situation that the price graph is showing you.
Advantages of the London Breakout Strategy
Aside from being an effective strategies, the London breakout strategy also offers a number of different advantages as well which include the simplicity of the system, the lack of the need for any indicators and the ease with which you can find your breakout levels where you can place your orders and often catch a breakout as well!
