Anyone who engages in a trade does this to make a profit. Trading the forex market is not an exception. Nevertheless, not many traders are consistently making a profit because the strategy via which one trades is key to success in the market. There are thousand and one strategies for trading the forex market, each with its pros and cons. Some have better pros than others. This write-up seeks to introduce forex traders to one of the most profitable strategies known as the London breakout.
The Forex Time zones
Before expounding on the concept of the London breakout strategy, let’s understand the various forex time zones there are since it is crucial to the right appreciation of this strategy. These time zones include; the Sydney Session, the Tokyo Session, the London Session, and the New York Session. The Sydney and Tokyo sessions are both referred to as the Asian session, while the London session represents the European session. It is important to note that the European session starts with the Frankfurt market open, which usually starts an hour before the London Session. During summer, the time zones are as follows:
- London Session: 07:00 am – 04:00 pm UTC
- New York Session: 12:00 pm – 09:00 pm UTC
- Sydney Session: 10:00 pm – 07:00 am UTC
- Tokyo Session: 11:00 pm – 08:00 am UTC
During the wintertime, the time zones are:
- London Session: 08:00 am – 05:00 pm UTC
- New York Session: 01:00 pm – 10:00 pm UTC
- Sydney Session: 09:00 pm – 06:00 am UTC
- Tokyo Session: 01:00 pm – 08:00 am UTC
The overview of the London Breakout Strategy.
The London breakout trading strategy is a system that is hinged on the breakout that comes from the range market that is formed during the less volatile Asian Session. Traders aim at going bullish if the price breaks above the upper boundary of the Asian range or going bearish when the price breaks below the lower boundary of the Asian range. The London open breakout strategy works because of the less volatility of the Asian session giving it a narrow trading range hence a breakout on either side of the range usually occurs when the volatile London session opens.
Marking out the Asian Range
The right marking out of the Asian range is key to the effectiveness of this strategy. The marking out can be done in two ways: The first is to mark the highest and lowest price level of the Asian session. The entire price action and the candlestick wicks are included in the marking out.
The second way is similar to the first, only that the wicks are excluded. This gives a narrower range helping to quickly identify breakouts for optimal trade entry.
Identification of false breakouts
One of the cons of this strategy is the tricks created by smart money in the form of false breakouts to search for orders to fill theirs. But you see, this trick leaves their trail which if figured out gives a high probability trade. This false breakout is more apparent when it occurs against the trend of the market.
How to Trade the London Breakout Strategy Effectively
The London breakout trading strategy is pretty simple to trade and there are two ways of executing this strategy:
- Fading the pre-London false breakout
- The direct breakout strategy
Fading the pre-London false breakout
This method seeks to figure out the false breakout during the first hour of the Frankfurt market that precedes the London Open. It has a better reward/risk ratio due to the identification of the false breakout. This method is executed as follows:
- Identify the trend direction and mark out the Asian range adequately.
The establishment of the direction of the trend of the market should be done on a higher time frame preferably on the H1 time frame since it’s an intraday setup. With the help of the right tools mark out the Asian trading session with horizontal lines or the rectangle tool. The Frankfurt Open and the London Open to differentiated using vertical lines. Cycle Lines can be used on the MT4 trading platform.
- Figure out false breakouts in the first hour after the Frankfurt Open:
As discussed earlier, false breakouts happen very often and traders must identify these breakouts before entering their trades. Smart Money tries to push the price beyond one of the boundaries of the Asian trading range to obtain stop orders (stop losses) and lure in retail traders for liquidity purposes to fill their orders.
- Taking the trade:
The retracing of the price back to the Asian range when the London market opens is a confirmation of the false breakout. After the retracement, look out for the market to move in the opposite direction to the false breakout to take your trades.
- Setting Stop Loss and Take Profit (TP) orders:
Usually, the take profit order should be twice the Asian Range or 1:2 or 1:3 Risk/ Reward ratio. The Average True Range (ATR) indicator can also be used to obtain a reasonable TP by setting the ATR to 20 periods. That level can be used as TP. It is advisable to scale out of winning trades whilst making the ATR level your final exit. The Stop Loss order should be higher than the highest point of the false breakout move if you are selling but below the false breakout if you are buying. You might also exit the trade after an hour if you are not yet in profit.
- Direct Breakout method
This is a system whereby traders enter the market after the price breakout out of the pre-London trading range and the candlestick closes above the upper boundary of the range or below the lower boundary of the range. It is important to note that false breakouts can be traded for true ones with this method. Notwithstanding, traders can beat these false breakouts by trading in the prevailing trend before the Asian trading range. This method can also be executed as follows:
- Identify the trend direction and mark out the Asian range adequately.
This is similar to how trend direction and pre-London range are marked out discussed under the Fading of the pre-London false breakout method.
- Breakout after the London Open:
The trick is to wait for a breakout during the London session, especially in the direction of the prevailing trend. Expect an upward breakout if there has been an upward trend before the Asian range and vice versa.
- Taking the trade:
The trade should be taken when the candlestick that caused the breakout closes above or below the Asian Range for both buy orders and sell orders respectively.
- Setting Stop Loss and Take Profit orders:
The take profit target should be twice the size of the Asian range or take your profit at will. The Stop Loss order should be set above or below the other end of the Asian range or in mid-range if it is too big for both sell and buy orders respectively. You can also use a time-based stop loss in which you close your trade if after an hour you aren’t in profit.
