The London Breakout Forex Trading Strategy is a popular method used by day traders to capitalize on the increased trading activity during the first hour of the London market opening. This strategy involves taking a position at the initial stages of a trend, using support or resistance levels as the basis for making trading decisions.
The goal of this approach is to identify potential trades with minimal risk exposure while maximizing profits.
To implement this strategy successfully, traders must have a thorough understanding of how it works and what factors influence its outcomes. In this guide, we will explore the mechanics of the London Breakout Forex Trading Strategy, its benefits and risks, and thoughts for implementing it effectively.
The London breakout strategy is a popular day trading strategy that involves taking advantage of upward or downward breakouts of a range formed prior to the London FX opening.
This session often sets the tone for the trend for the rest of the trading day.
The high liquidity and volatility during this time make it attractive to traders looking to capitalize on quick price movements.
By identifying support or resistance levels, traders can take long or short positions during the breakout and exit them depending on preference.
Overall, understanding this session’s importance and implementing a breakout strategy can be profitable for traders looking to capitalize on this market’s opportunities.
Why Trade The London Session Breakout
As one of the primary financial hubs, London witnesses massive liquidity and increased volatility, especially during the early hours. This is attributed to the overlap of the London session with the tail end of the Asian session and the beginning of the New York session.
The London Breakout Strategy is designed to capitalize on these early hours, targeting potential price breakouts that arise from the increase in trading activity. By understanding the nuances of the London session/Asian session and using the London Breakout Strategy, traders can position themselves to take advantage of the market’s momentum and increase the chances of making some pips.
What that means is that:
- Whatever the trend direction of GBPUSD during the first 1-3 hrs of London Forex session in determines what the trend would be for the remainder of the London fx session.
- What this means also is that this trend may continue through to the US trading session.
The London Breakout Forex Trading Strategy is all about catching the trend move to the upside or downside during the early hours of the London market opening.
During the early hours of the London session, the forex market is particularly sensitive to major economic news releases. These announcements, which can range from employment figures to interest rate decisions, have the potential to significantly sway the market, causing sudden spikes in volatility.
London, being a major financial hub, often sees the release of crucial data pertaining to the UK and European economies. The influence of such news can be huge, often setting the tone for the trading day and offering traders opportunities to capitalize on price movements.
London Breakout Trading Strategy: Step-by-Step
- Identify the Range: Begin by identifying the range of the Asian trading session. This involves marking the highest and lowest price points during this session.
- Set Up Pending Orders:
- Buy Setup: Place a buy-stop order 5 pips above the high of the Asian range.
- Sell Setup: Place a sell-stop order 5 pips below the low of the Asian range.
- Determine Stop Loss and Take Profit:
- Stop Loss: For buy orders, set the stop loss 2-3 pips below the low of the range. For sell orders, set it 2-3 pips above the high of the range.
- Take Profit: Set a take-profit target based on your risk-reward ratio. A common approach is to aim for a target that’s twice the distance from your entry point to the stop loss.
- Monitor Economic News: Stay updated with major economic news releases scheduled during the early hours of the London session. These can impact volatility and the direction of price movements. If in doubt, get out.
- Trade Management: Once your trade is triggered, monitor its progress to make sure momentum stays in your direction. Consider moving your stop loss to break even once the trade moves in your favor by a certain number of pips (or 1 times your risk). Using a trailing stop can also help lock in profits in case you have latched onto a major trend.
- Trade Exit: Close the trade either when your take profit target is reached or at the end of the London trading session to avoid potential reversals during the New York session.
- Review and Analyze: After the trade is complete, review the outcome. Analyze what went right or wrong and consider any adjustments to improve the strategy for future trades.
Placing Your Breakout Trade Orders – Recap
You need to place two opposite pending orders, a buy-stop order and a sell-stop order simultaneously (unless using trend). Remember, you are aiming to catch a breakout trade either up or down and these orders will trigger you into the trade.
|Place buy stop order anywhere from 5 pips above the top horizontal line|
|Set stop loss at least 5 pips below the lower horizontal line|
|Place sell stop order 5 pips below the low of the lower horizontal line|
|Set stop loss at least 5 pips above the top horizontal line|
Wait for the price to activate one of these two pending orders. As soon as one is activated, you need to cancel the other pending order.
Some traders will only focus on the dominant trend in the currency pairs and take that trade. If a bullish trend, traders will only take long positions. With a bearish trend, they’d look to short the currency pair.
How To Manage Your Trade
Effective trade management is the key to successful trading, ensuring that traders not only enter the market at certain moments but also optimize their exit strategies to protect profits. One of the most popular trade management techniques is the act of moving the stop loss to a break-even point. By doing so, traders can eliminate the risk of a loss on a trade that has moved in their favor, essentially creating a “risk-free” trade scenario.
Imagine you went long and placed your stop loss 20 pips from entry. Once the price has moved in your favor by 1 or 2 R (20 or 40 pips), move the stop to break-even
The use of trailing stops is another invaluable tool. A trailing stop dynamically adjusts itself when the price moves in your direction, locking in profits while still allowing the trade to benefit from potential further positive price action.
There are many ways to trail your stop including using price structure as the price moves in your direction. Technical indicators that are often used are moving averages and even the ATR stop loss.
When you combine these it helps ensure that traders maximize their profit potential while minimizing potential losses or giving back too many gains.
How To Close The Trade
I strongly suggest you follow this here: At the end of the London trading session, you must close your trade.
This is not one of the many swing trading strategies available and you don’t want to carry this position overnight. Even if it means you have a 10-pip profit or a 10-pip loss. Just close it. Never hang on your trade hoping for a few more pips in the US trading session.
London Breakout Strategy – Pros and Cons
The London Breakout Strategy does have a lot of benefits but is not without its risks, and you should know what they are.
|1. Inbuilt Trade Management:
– Utilizes early London session volatility for potential profits.
|1. Breakout Failures:
– Risk of false breakouts leading to losses.
|2. Precise Risk Control:
– Allows for setting clear stop-loss and take-profit levels.
|2. Impact of Economic News:
– Economic news releases can affect trade outcomes during the London session.
|3. Quick Profit Potential:
– Offers the possibility of profitable trades in a short timeframe.
|3. Analytical and Disciplinary Demands:
– Requires constant analysis, staying updated with economic news, and strict trading plan adherence.
One of the standout benefits of this strategy is its inbuilt trade management. By focusing on the early hours of the London session, traders can take advantage of the heightened volatility, potentially securing profitable trades within a short amount of time.
This strategy’s design (breakout of a trading range) allows for the setting of precise stop-loss and take-profit points, giving traders a clear exit strategy, and minimizing potential losses.
Like all trading strategies, the London Breakout is not foolproof.
One of the primary risks traders face is breakout failures. There are instances where the price might seem to break out of its range, only to reverse direction (sometimes called a head fake or bull/bear trap). These failed breakouts can lead to losses if not identified and managed.
The strategy’s reliance on the early hours of the London session means that significant economic news releases during this period can impact trade outcomes. It hits home on the importance of analysis, staying updated with economic news, and maintaining discipline in trade execution and management.
Frequently Asked Questions
What are the best forex pairs for the London breakout strategy?
The best forex pairs for the London breakout strategy are typically those that are actively traded during the London session. Some popular pairs include EUR/USD, GBP/USD, USD/JPY, and EUR/GBP. These pairs tend to exhibit increased volatility and liquidity during the London session, which makes them suitable for implementing the breakout strategy.
How effective is the London breakout strategy?
The effectiveness of the London breakout strategy can vary depending on market conditions and individual trading strategies. However, the London breakout strategy has gained popularity among forex traders due to its potential for capturing substantial price moves during the opening of the London session. By identifying breakouts above or below key price levels, traders aim to take advantage of momentum and capitalize on significant price movements.
Is London breakout profitable?
The profitability of the London breakout strategy depends on various factors, including the trader’s skill, risk management, and market conditions. While the London breakout strategy has the potential for profitability, it is important to note that not all trades will be successful, and losses can occur. Successful implementation of the strategy often requires careful analysis, proper risk management, and adaptation to changing market dynamics.
What pairs move the most during the London session?
Certain forex pairs tend to exhibit higher volatility and increased trading activity during the London session. Pairs such as EUR/USD, GBP/USD, USD/JPY, and EUR/GBP tend to move significantly during this session. These pairs are influenced by economic releases, news events, and market sentiment during the active trading hours in London, which contributes to their higher levels of movement.
What is the success rate of the opening range breakout strategy?
The success rate of the opening range breakout strategy can vary depending on multiple factors, including market conditions, timeframes, and the specific rules employed by traders. Generally, the success rate of this strategy relies on accurately identifying the opening range, setting appropriate entry and exit points, and applying risk management techniques. However, it is important to note that success rates can differ among traders and there is no fixed percentage that can be attributed universally to the opening range breakout strategy.
The London Breakout Forex Trading Strategy can be a profitable approach to day trading in the forex market. However, it is important for traders to understand the mechanics of the strategy and implement it with caution.
While there are benefits such as taking advantage of increased trading activity during the first hour of the London market opening, there are also risks involved. Traders must carefully analyze the range, use support and resistance levels as a basis for taking positions, and limit risk through stop-loss orders.
While this strategy can potentially yield huge gains for traders who execute it correctly, failure to do so could result in significant losses. As with any trading strategy, it is crucial for traders to have a comprehensive understanding of its mechanics and limitations before implementing it in real-time scenarios.
Overall, by considering all factors involved and executing trades strategically and thoughtfully, traders can potentially profit from the London Breakout Forex Trading Strategy while minimizing risks.
Updated OCT 2023