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 the formed prior to the London FX open.
This session sets the tone for the trend for the rest of the trading day, making it an essential part of any trader’s strategy.
The high liquidity and volatility during this time make it attractive to traders looking to capitalize on these movements.
By identifying support or resistance levels, traders can take long or short positions and exit them quickly.
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
The London trading session is the biggest Forex market mover as much of the trading volume for currency trading is during this session.
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 volumes of trades and the amount of money that moves during the first few hours of the London Forex market opening hours are HUGE which creates some exciting trading opportunities.
So that explains the background of what and why of the London Breakout Forex Trading Strategy: its all about catching the trend move to the upside or downside during the early hours of the London market opening.
Implementing the Strategy
- Implementing this approach requires an analysis of the market’s behavior during the first hour of trading.
- Traders must be vigilant and monitor the forex market before initiating a long or short position a few minutes after the markets open, based on support or resistance levels.
- Stop-loss orders provide an excellent way to automatically have traders exit a position with a loss.
- To maximize profits, traders should strategically analyze previous breakouts and rely on prior resistance or support levels beyond where prices have increased or dropped.
- Despite breakout failures and limited opportunities to exploit breakout trading, placing stop-loss orders is crucial for limiting risk exposure while achieving significant gains on successful trades.
How To Place Your Breakout Trade Orders
You need to place two opposite pending orders, a buy stop order and a sell stop order at the same time.
Remember, you are aiming to catch a breakout trade either up or down….
|Place buy stop order anywhere from 1-2 pips above the top horizontal line|
|Set stop loss at least 5 pips below the lower horizontal line|
|Place sell stop order 1-2 pips below the low of the lower horizontal line|
|Set stop loss at least 5 pips above the top horizontal line|
Wait for price to activate one of these two pending orders. As soon as one is activated, you need to cancel the other pending order.
Where And How To Place Your Breakout Orders
The next thing you need to know is where to place your trade entry order to trade the London breakout.
Here’s how to do that:
- identify the 3 previous candlesticks in the Asian Forex trading session.
- then find the high and the low of these 3 candlesticks because they form your breakout levels.
- on the highest point of these three candlesticks, draw a horizontal line. If price breaks above this line, its a buy signal.
- on the lowest price point between these 3 candlesticks, draw another horizontal line. If price breaks below this line, this is your sell signal.
How To Manage Your Trade
Here are a few options you can use to managing your trade, and whichever you chose, it really up to you:
- Move stop loss to break-even when price moves 2 times the initial risk. For instance, if the stop loss is set at 30 pips, adjust it to break even when price moves 60 pips. This prevents premature stop-outs and allows sufficient room for price movement.
- Implement a trailing stop to secure profits as the trade moves favorably. One technique is to trail the stop by the same number of pips as the price movement, such as trailing by “x” pips when price moves by “x” pips or trailing by “x” pips when price moves by “2x” pips. For example, if price moves by 30 pips, move the trailing stop by 30 pips. Alternatively, moving the stop loss behind swing high or low points as price moves in your favor reduces the risk of premature stop hits and is considered the most effective trailing stop technique.
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 mean you have a 10 pips profit or a 10 pips loss. Just close it. Never hang on your trade hoping for a few more pips in the US trading session.
In Forex trading, HOPE and PRAYER has no place, you follow a system. And also remember, there is always tomorrow.
Benefits of the London Breakout Strategy
One significant benefit is the use of stop orders, which allows traders to limit their risk exposure and exit positions quickly.
Additionally, successful breakout trades can result in significant gains due to the increased buying or selling pressure triggered by price breakouts.
The strategy also offers an inbuilt trade management capability, making it easier for traders to manage their positions effectively.
Considerations and Risks
While the London Breakout Strategy can result in significant gains, it is not without risks. Traders should be aware of the possibility of breakout failures and limited trading opportunities. Additionally, it is crucial to place stop-loss orders to limit risk exposure.
The strategy requires careful analysis and discipline to execute successfully, as well as strict adherence to trading rules and settings during backtesting to avoid hindsight bias.
Overall, while there are advantages to using the London Breakout Strategy, traders must weigh them against the potential risks before deciding whether or not to incorporate it into their trading plan.
Frequently Asked Questions
What are the best forex pairs for 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 are known for their tendency to move significantly during this session. These pairs are influenced by economic releases, news events, and market sentiment during the active trading hours of 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 effective 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 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 exposure through stop-loss orders.
Ironically, 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 May 2023