How to Trade the London Breakout Strategy
It is quite difficult to work in the Forex market without any strategy. That's why hundreds of thousands of traders are testing and improving existing tactics daily in search of the one that will bring impressive profits. One of such strategies can be called the London Breakout. The system of trading over the time of its existence has grown many variations, but its essence remains the same. Let's examine in detail several ways of trading this Forex strategy.
What is the London Breakout strategy
The London Breakout trading system is based on the fact that at night, during the Asian trading session, the market liquidity is very small, and the price trades in a narrow corridor, "flat". The market has no liquidity to move beyond the boundaries of the flat. However, when trading opens in London, traders from London and Frankfurt come to the market. The system is based on the trader's ability to "catch" the price momentum after the start of trading in London and Frankfurt, and follow the daily trend throughout the trading session. One of the basic postulates of the Forex market tells us that the first price impulse at the opening of the trading session sets the tone for the whole session. The main thing is to correctly assess the market movement, and at the right time to place an order. The system is originally non-indicator, but most traders use tools to mark flat boundaries. There is also trading with the I-Cassier Work Time advisor that makes a timing markup on the chart. Some traders trade with an indicator of trading sessions, which allows you to better focus on the opening time of the trade. We recommend checking out all of the Gann indicators. A tool that applies a grid pattern to the chart can be used to filter out a flat. Pay attention that all the indicators we have listed do not give any entry points. They are only trading helpers.
The main advantage of the strategy is that it saves time. It is suitable even for those who can devote only 30 minutes a day. At the same time, it is important to remember that it makes sense to practice this strategy if you understand the market dynamics. It is not uncommon for 3 or even 4 false breakouts to occur in a row. Before applying this strategy, it is important to carefully study the dynamics.
What currency pairs to trade for London Breakout
It should be mentioned that the creators of the system believe that EUR/USD and GBP/USD are top pairs to trade for London Breakout. Still, most traders will agree that the best currency pair for the London Breakout strategy is GBP/USD. There are several reasons for that: the pair GBP/USD is easier to analyze technically at higher time frames, and it has a more pronounced trend; GBP/USD is more volatile during the trading day, which allows you to earn at least 1.5 times more. GBP/JPY and AUD/USD are universal currency pairs; with which you can earn by breaking each trading session. Just open the price chart and look at historical data to make sure. We would like to warn novice traders that losing trades will also occur. On average, within a month of 50 trades, about ten will be closed at a Stop Loss. That is why setting the limiting orders during the trading process is a must.
Now, since we have learned the logic behind this approach let us see how to trade the London Breakout.
Trading the London Breakout
There are several varieties of the London Breakout system. The classic approach involves trading only during the London and American trading sessions. The time frame should not be high, the best option here is M15. It is necessary to start the analysis of the chart 5-10 minutes before the opening of trading in London. We will trade with the help of pending orders and place orders at a distance of 5 points from the limits of the flat of the Asian trading session. By the way, the new version of the strategy implies trading on the М30 chart.
Let us start with the classical one. Before you start trading, you need to mark out the Asian trading range. That is the Asian trading session. To do this, set the horizontal lines to maximum and minimum prices between 00:00 and 08:00 server time. If it exceeds the number of 60 pips, it is better to postpone trading on that day. It is considered that the main movement for today the pair has already passed, and the next impulse will not have the necessary power to reach Take Profit. If this number is less than 60 pips, it is safe to start trading.
At a distance of 5 points on the four digits, set the order Sell Stop and Buy Stop. Stop Loss and Take Profit are set on a special system. The length of the order, which will protect your deposit from unforeseen situations, should be 50% of the size of the trading range of Asia and + 5 points. The TP should be equal to the full width of the range. All non-triggered orders are deleted exactly at 10:00 server time. If a Buy position is triggered, we delete the Sell position.
Before we move to the new approach London open Breakout trading strategy, you should know that there is one disadvantage of the original strategy. It is the market-makers who arrange false breakouts to collect liquidity in the opposite direction. The market becomes volatile after London and Frankfurt open. A typical situation: in the first 20-30 minutes after the start of the European session, a powerful price impulse starts, which breaks through the Asian flat boundary. However, afterward, the breakthrough is false, and the price turns in the other direction. Stops are triggered on most accounts, and the market-maker collects liquidity, saturating its position. Therefore, enthusiasts have created a more perfect version of the London Breakout, which takes into account all the disadvantages of the "classic". In the modified version, just like in the classic one, trades are opened by pending orders. Exactly as well, the orders are placed on the borders of the Asian trading session channel. The only difference is that the time of opening of positions differs. The pending orders are set two or three hours after the start of trading in London.
In the case of the improved London Breakout, the morning flat is also marked from 00:00 to 08:00 server time. Limits are placed at a distance equal to 50% of the Asian trading range. Orders are placed at 8:00 server time. It often happens that one of the orders goes to the profit, but does not reach the Take Profit. To avoid it, you should close the order at the juncture of the European and Asian sessions. The Stop Loss and Take Profit are set similarly to the classical system.
How profitable is the London Breakout strategy
Needless to say, any strategy can be disastrous if not used properly. In the same way, any approach has all the chances to become victorious when the trader is doing due diligence and following all the steps properly.
Subject to the rules of money management, the potential profitability of the forex London session breakout will be about 20%-30% a month.
To achieve such a profit, it is important to correctly follow the instructions and observe the rules of money and risk management. We would like to say that the specified profitability of 20%-30% per month is not a limit. It all depends on the trader's personal qualities and trading experience.
What are the best forex pairs for London Breakout
As we have already mentioned at the beginning, GBP/USD is considered to be the best currency pair for the London Breakout strategy. And here's why. Cable, as it's called by the seasoned traders, is usually not actively traded before the opening of the European session. This is because the only market that opens before Frankfurt and London is the Tokyo market. Cable does not trade in large volumes during the Tokyo session. That's why there is a lot of volatility when traders enter the market at the start of trading in Frankfurt, which is soon followed by the opening of trading in London. Most other currency pairs are traded more evenly throughout the day and therefore this strategy is not as effective for them.
Also, GBP/USD is a volatile currency pair. It makes large fluctuating movements that create excellent profit opportunities. However, where there are large swings and profit potential, there is also the possibility of being knocked out of the market on a stop order. Therefore, we wait for the market to move in both directions before opening trade to reduce the likelihood of a stop order being triggered. Once these initial price movements have occurred, the next move, the expected breakout, is more likely to have a continuation because any weak positions have been kicked out of the market during the initial swings.
What is 2 hour London Breakout strategy
There is also such a strategy as a 2-hour London open. Basically, it is a price action strategy, meant to catch the breakout of the high and low of the 2nd-hour candlestick following the London exchange opens. It can be used to trade on the following currency pairs: GBP/USD, GBP/JPY, GBP/CHF. The recommended time frame is H1. The algorithm of trading goes as follows:
- Two hours after the London opens, and as soon as the 2nd-hour candlestick closes, open buy stop and sell stop orders on the high and low of that 2nd-hour candlestick. Once one pending order is triggered, delete the other one right away;
- The orders placed should be 2-3 pips above the high or low of the 2nd-hour candlestick;
- Stop Loss should be set 2-3 pips above/below the high/low of the 1st-hour candlestick;
- Take Profit should be placed at 30 pips;
- According to traders, you should not move the Stop Loss to breakeven or apply the trailing stop to secure the profit. Make sure to let the market do its job, bringing you profit, or losses if you are not lucky enough.
The London Breakout Strategy is very reliable; it has been tested by generations of traders for a long time. We have learned the two most used variants of the system. Before using the London Breakout strategy backtest on a demo account is a must, otherwise, the risk will be increased with the geometrical progression. Don't forget about risk management and money management. Also, take into account the fact that the working lot for trade should not exceed 0.01 lots for every $100 of your deposit. Looks like that's it... Good luck :)