London Breakout Strategy - A Simple Way of Day Trading.

The London breakout strategy, also known as the London daybreak strategy, is one of the most common and straightforward Forex trading strategies.

Fundamentally, it is a momentum trading strategy as we use the coiled-up energy from the Asian session to trade the London session. This strategy is popular and effective among forex traders aiming to exploit significant movements in currency pairs during the early hours of the London trading session.

This strategy is similar to the typical breakout trading approach, but the difference lies in the timing of its usage.

Understanding the London Session in the Forex Market

Most professional traders, significant players, banks, and global institutions place their bets at the beginning of the London trading session, which is known for its significant movements in currency pairs during the early hours when London traders enter the market.

That is why we often see a lot of trading activity in this session. Asian session ends just before the start of the London session.

Trading the London session can be highly profitable if we understand how to trade it correctly.

However, before directly jumping into the technicalities of the strategy, let’s discuss what currency pairs are most tradable in the London session.

Suitable Currency Pairs 

We should not be sticking to one or a set of currency pairs in any particular session.

Instead, our focus must be purely on which currency pair has a lot of action going or which pair is offering a lot of trading opportunities. 

Hence, instead of restricting ourselves by sticking to a set of pairs, it is advisable to look out for pairs that offer great trading opportunities and then trade them.

EUR-USD and GBP-USD are two of the most common currency pairs traded during the London session.

Understanding the London Breakout Strategy

15-Minute London Open Strategy: Rules

The London session starts at 08:00 UK local time, so we suggest you prepare yourself and be with a positive mindset just before the opening of the London market. During the Asian trading session, identify the highest and lowest prices and mark the range.

In winter, 08:00 UK local time is 08:00 UTC; during British Summer Time it is 07:00 UTC. Match the London open to your broker's server clock before marking the opening candle, because server time can differ from UTC and may change seasonally.

The KT Forex Session Indicator draws the session boxes straight onto the chart, so you can see where London actually opens on your platform.

Use the same rules for every test:

1. Use a 15-minute chart and note the higher-timeframe direction.
2. Mark the highest and lowest prices formed during the Asian session before the London open.
3. For a long setup, wait for a 15-minute candle to close above the Asian-session high. For a short setup, wait for a candle to close below the Asian-session low.
4. Place the stop beyond the opposite side of the breakout structure or another predefined invalidation level.
5. Set the target before entry using the next higher-timeframe support or resistance level or a fixed risk-to-reward rule.

Live Trade Example 1

The Forex market EUR/USD pair is in an uptrend. 

Buy Entry

The chart below illustrates a EUR/USD breakout after the London open. It is an example of the setup, not evidence of expected performance.

It's advisable to use the pending orders for optimal entry.

Stop-Loss and Take-Profit Placement

The stop-loss is placed below the most recent higher low. In this example, that level is where the long setup would be invalidated. Define it before entry rather than assuming that a shallow stop is safe.

Most of the time, the volatility during the opening of the session spike significantly less.

Improving the Underlying Strategy

The London breakout strategy backtest is crucial for assessing the reliability and effectiveness of the strategy. By backtesting using specific trading rules and settings, traders can avoid hindsight bias and manage risk effectively.

Treat the chart examples as illustrations, then backtest the same entry, stop, and target rules across historical data. Record the risk-to-reward ratio, win rate, spread, and slippage, and confirm the process on a demo account before live use.

But we can improve the odds of this strategy working by waiting for additional confirmation:

1. Find a strong uptrend in any volatile currency pair. 
2. The instrument's price must be held at the significant resistance level in the Asian session. 
3. Right after the breakout, look out for the formation of a few confirmation bullish candles.
4. Use the buy stop order or sell stop order to enter the market.
5. Remember, the price action must hold above the breakout line to confirm the buy entry.
6. Place the stop-loss just below the close of the recent candle. 
7. The take-profit must be placed at the higher timeframe's significant resistance area or exit your positions when the buyers' momentum starts to die.

Live Trade Example 2

The chart below illustrates an uptrend in the GBP/AUD currency pair. It is an example of the setup, not evidence of expected performance.

Buy Entry

The London session opened at the broker's GMT-adjusted opening candle, and the breakout in this pair happened one hour after the market opened.

Here, after the breakout, we can see the price break above the breakout line for a while and started printing bullish confirmation candles.

This confirms that the breakout is accurate, and we can confidently place our buy trades.

Stop-Loss and Take-Profit 

As in the above strategy, we have placed the stop-loss below the breakout line. We held our position and placed the take-profit order at the higher timeframe's significant resistance line. 

If you are in the US, the London breakout happens in the middle of the night. But the good news is that you can trade this strategy well during the London session's second half. 

Pros

• No Complicated indicators are required to trade this London breakout Forex strategy.
• It offers a high risk-reward ratio from 1:2 to higher.
• There is no need to spend hours waiting for the perfect signal.
• An ideal strategy for day traders.
• The target can be defined from higher-timeframe structure or a fixed risk-to-reward rule before entry.
• The rules can be backtested consistently across different pairs and market conditions.

Cons

• High volatility during the London session can sometimes lead to price shocks and spikes.
• Widen spreads and slippage during the session opening.
• High-impact news during the London session sometimes creates panic among the market participants.
  
  

Conclusion

It is always advisable to test these strategies on a demo account first by following the game’s rules. The New York session is significant for traders due to its high liquidity and volatility, especially during its overlap with the European session.

This strategy’s crux is to trade the London breakout by finding out the proper breakout and checking whether the currency is volatile enough or not.

Also, it’s advisable to use a trailing stop to capture more profits. Place the stop-loss at the breakeven as soon as the position hits half of your target.

The London breakout trading strategy is known for its potential for daily pip yield and is ideal for trading currency pairs like EUR/USD and GBP/USD.

P.S. You must check our automated expert advisor, KT London Breakout EA, based on a similar strategy suitable to trade the London session.