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 most straightforward trading strategies out there.
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 kind of similar to the typical breakout approach, but the difference lies in the timing of its usage.
The London breakout strategy is based on two main concepts - The opening of the London session and the increase in volatility that usually occurs at the beginning of this session.
Understanding the London Session
Unless you are an absolute novice trader, you would have known about the three significant trading sessions in the Forex market. They are Tokyo, London, and the New York sessions.
We consider them vital because of the high volatility observed during this session. These three cities and their time zones represent some of the most significant accumulations of market participants.
Tokyo session starts first, and at times we don't see much volatility here because half the world will be sleeping at the opening of this session. Hence, most of the Australian and Japanese traders trade the Forex markets during the Asian session.
Most of the professional traders, significant players, banks, and global institutions place their bets at the beginning of the London session. This is the reason why we often see a lot of trading activity in this session. Asian session ends just before the start of the London session.
Hence, before the London opening, Asian traders make sure to square off their positions as they believe that the upcoming high volatility might affect their positions. Although it is a general belief that the New York session has the most significant influence on the Forex market, it is not entirely true.
The geographical locations of the English country, between North America and Asia, overlaps with either one of them. Hence the higher volatility and increment in volume often provide massive liquidity for traders across the world.
All we want to say is that trading the London session can be extremely profitable if we understand how to trade it in the right way. In this article, we are going to learn precisely about that. 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 for London Breakout Strategy
When it comes to trading the London session, it is a general perception that it is safe only to trade the GBP and Euro.
However, it is not true. When we talk about trading the London session, we don't refer to trading the GBP pairs alone.
It is also a false assumption that the New York and Asian traders trade only USD, CAD, JPY, AUD, and NZD pairs. Most of the other major and minor currency pairs also experience a lot of volatility in each of the trading sessions.
We, as professional technical traders, 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.
Most of the currency pairs do have considerable volatility during the overlap of the New York and London trading sessions.
Hence, instead of restricting our self by sticking to a set of pairs, it is advisable to look out for pairs that offer great trading opportunities and then trade them.
Understanding the London Breakout Strategy
As the name pretty much suggests, the London breakout strategy is purely built upon the increased volatility during the first few hours of the London Session.
We recommend you use the candlestick charts to trade this strategy as it allows the traders to read the market sentiment in a better way.
The trading timeframe must be either one hour or 15 minutes. The London session starts at 07:00 GMT, so we suggest you prepare yourself and be with a positive mindset just before the opening of the London market.
Follow the below rules of the strategy to make profitable trades:
- Find a currency pair that is in a trending state. In this example, let's consider an uptrend.
- The instrument must hold at a significant resistance level in the Asian session.
- Wait for the price to break out in the London session.
- Take buy entry when you see the price action closing above the breakout line.
- Place the stop-loss just below the closing of the recent candle.
- Take-profit order must be placed at the higher timeframe's significant resistance area.
Live Trade Example 1
After a quick check, we have found that the EUR/USD Forex pair is in an uptrend. Hence we have chosen this pair to trade the London Breakout Strategy.
In the below chart, we can see that the London session opened at 07:00 GMT, and price breakout at around 08:15 GMT, which is close to one hour after the London opening.
The moment when we observe the price action breaking and closing above the resistance line, we took a buy entry in this pair.
Stop-Loss and Take-Profit Placement
You can see in the below chart that we have placed our stop-loss just below the most recent higher low. It is safe to go for a shallow stop-loss because the breakout acts as a major support area to the price action.
Most of the time, the volatility during the opening of the session spike very less. This is one more reason why we can go for smaller stop-loss.
The general idea of placing the take-profit order is at the higher timeframe's resistance area. But in this pair, there was no significant resistance area. Hence, we had decided to close our positions when the momentum of the buying trend started to die.
Improving the Underlying Strategy
The strategy that we have shared above is very well backtested, and without any doubt, it provides a considerable risk to reward ratio trades. But we can improve the odds of this strategy working by waiting for additional confirmation.
After reading the above strategy, if you are thinking, how can we hit the trade just after the breakout without even confirming if the breakout is real or not, you are a confirmation trader.
Confirmation traders always look for additional confirmation to activate their trades. On the other hand, traders who make trades as soon as the breakout happened are aggressive traders. This kind of traders will always tend to take more risks for an extra reward.
Every trader has their own personality, and it is reasonable to be either a confirmation or an aggressive trader. If you are the type of trader who does prefer taking the risk, it is advisable to follow the below strategy.
The only drawback with this strategy is that we will be joining the party a bit late but with complete security. Below are the rules of the improved London breakout strategy.
- Find a strong uptrend in any volatile currency pair.
- The price of the instrument must be held at the major resistance level in the Asian session.
- Wait for the breakout to happen in the London session.
- Right after the breakout, look out for the formation of a few confirmation bullish candles.
- Remember, the price action must hold above the breakout line to confirm the buy entry.
- Place the stop-loss just below the close of the recent candle.
- 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 below chart represents an Uptrend in the GBP/AUD Forex currency pair.
The image below represents our buy trade in the GBP/AUD Forex pair. The London session opened at 7:00 GMT, and the breakout in this pair happened one hour after the market open.
Most of the aggressive traders took entry right after the breakout occurred, as we did in the above strategy.
Here, after the breakout, we can see the price action holding above the breakout line for a while and started printing bullish confirmation candles. This confirms that the breakout is real, and we can confidently place our buy trades.
We have entered the market after the formation of the 4th bullish confirmation candle.
Stop-Loss and Take-Profit Placement
We have placed the stop-loss just below the breakout line just like we did in the above strategy. We have decided to go for deeper targets as the buyer momentum is pretty high. Hence, we held our position and placed the take-profit order at the higher timeframe's significant resistance line.
But as you can see in the below chart, every time the price touches the resistance line, it is getting smacked back. We can see that the most recent leg of buyers was very weak, which indicates that the buyers are now exhausted. Hence we exited the position at the last printed candle.
If you are in the US, the bad news is that the London breakout happens in the middle of the night. But the good news is during the second half of the London session you can trade this strategy very well. You can even apply the same rules to take advantage of the New York opening breakouts.
Pros and Cons of Trading the London Breakout Strategy
One major advantage of trading the London breakout strategy is that it is straightforward and easy to use. There is no complicated indicator mastery required to trade this strategy. We can easily aim for 1:2 or even higher Risk to Reward ratio trades.
We don't have to spend hours or days together to wait for that perfect signal. Most of the time, this strategy helps us in cashing out the market within a few hours.
As a result, we get a lot of time to prepare and find the best chart setups for the next trading day. This method of making money is ideal for the day traders; all we need to do is to stay disciplined every single day and follow all the rules of the strategy.
No strategy or system can guarantee a 100% success rate. Every strategy is unique, and all of them do have some flaws in them. So it is advisable not to expect that this strategy will work all the time.
What differentiates an amateur trader from a pro is their ability to understand when to pull the trigger and when not to.
Sometimes, during the opening of the London session, volatility is quite strong that it can lead to spikes. So it is advisable to read the market circumstances very well before taking any action.
Another critical aspect is to focus on the spread during the opening of the London session; most of the brokers widen their spreads so that they can trap some traders.
Also, there will be days where the economic calendar is packed with back to back news. At these times, the news creates a lot of panic in the market, and hence it is advisable not to activate our trades.
That's about the London breakout strategy and trading the London session. This article is helpful for both aggressive and confirmation traders, as we have discussed both the strategies.
Also, it is a good idea to trail your stop-loss. Place the stop-loss at the breakeven as soon as the position hit half of your target.
We must do this because, sometimes, bigger players do create the illusion of fake breakouts to trap more people, and in the end, they move markets to the opposite side.
When your stop is at the breakeven, you can easily survive from any fake moves.
It is always advisable to test these strategies on a demo account first by following all the rules of the game.
Finding out the proper breakout and checking that the currency is volatile enough or not is the crux of this strategy.
Always stay patient and trust your strategy. If all the things mentioned above are kept in mind, you can easily ace the markets just like any professional Forex trader.
We hope you find this article informative. If you have any questions, shoot them down below, and we would be more than happy to answer them. Cheers!
P.S. You must check our automated expert advisor named KT London Breakout EA, which is based on a similar strategy suitable to trade the London session.