The London Breakout Strategy takes advantage of the trading range that sets up generally during the Asia session in Forex.
Also known as the London Daybreak Strategy, it’s a day trading strategy that looks to be active during the first three hours of the London market session.
To trade the London Breakout Strategy:
- Define the trading range that occurs during the Asia session
- Mark of the highs and lows – essentially the support and resistance zones of the session (using closing prices as well)
- Use bracket orders to catch breakouts to the upside or downside (general way of trading but not the best way)
Let’s break down further details of this day trading breakout style strategy.
Why Does The London Breakout Strategy Work?
When the London session begins, you are seeing the opening of a major financial centre.
Because London is a major centre, a lot of trading volume steps into the market when it opens causing volatility. With increased volatility, you see increased trading opportunities.
Remember, at the open, there is no other financial centre open other than the smaller volume Asian market so competition for market direction is not as strong. Once the U.S. trading sessions opens and overlaps with London, we can often see less price movement.
As the session goes on, volatility may change so ensure you have another day trading strategy you can use after the initial opening price movement is complete or underway.
Define The Overnight Trading Range
There are two main ways you can define the Asia session trading range.
In this example, we are looking at using the extreme highs and lows of the Asia session in grey and using the closing in green.
Does it really matter which one you use? Not really although I prefer to use the entire range of price that the session had. There may be merit in using closing prices if it gives you a quicker entry but it depends on your trading psychology. Some traders need the little extra confirmation that breaks of the extremes may give.
The key is to be consistent in your approach and not flip between them if one day closes works better than the extremes.
How To Trade The London Breakout
There are essentially 2 main methods to day trading the breakout of the Asia session range once London opens.
- Fade the pre-London range breakout
- Trade the breakout when London opens
The first method requires you determine the Asia session range but to leave the last hour to see if there is a break prior to London opening. This requires some knowledge of price action that is easily acquired and we will discuss it later.
The second method is the standard bracket order with stop orders and go with the first one that is hit.
Fading the Pre-London Breakout
Remember, we need to see what happens to price during the last hour of the session prior to London opening up. What we are looking for is a breakout of consolidation during Asian session to set us up for a London opening fade.
- Mark off the Asian session highs and lows up to the final hour or before London opens
- Look for a break of the range in either direction
- If price fades the breakout direction, take a position
Some trading rules for fading the Asian session breakout is to wait for the first five minutes to elapse.
For me, look for structure that you can trade against. In our example here, the breakout to the upside formed a range and obvious support level as price bases at high.
No need to wait for five minutes to pass as you can sell stop the lows of the range and be part of the move down.
How To Take Profits
Traders can use a variety of techniques for profit taking such as taking profits at a support or resistance zone.
Others traders may choose a trailing stop or time based stop. Price action traders would read price action and look to exit when momentum is gaining against their trade. Whatever you choose, be specific and consistent in your rules.
Standard London Daybreak Strategy
The standard way of trading this strategy is to bracket order highs and lows and see what happens.
How about choosing the trend direction and trading a breakout in that direction.
This is a 15 minute Forex chart and the one hour time frame shows an up trending market.
- Mark of session highs and lows
- Look for price to close outside the range in the direction of the longer term time frame
- Place a buy stop above the highs of the first candlestick the close
- Stop loss can go below the breakout candlestick
We put the odds in our favour by implementing the trend direction for the breakout we will trade.
What Currency Pairs To Trade For London Breakouts
Considering we are trading an overlap of the Asian session and London session, those currency pairs should be used.
For my money, GBP crosses including GBPUSD, GBPJPY and of course EURJPY and even EURGBP.
You never know which one is going to perform for this strategy on any given day. Having all the pairs up and take the “best looking” setup, is the better way to trade the London Breakout.
If you only feel comfortable trading one Forex pair for this strategy, consider the GBPUSD for liquidity issues and big money interest.
London Breakout Strategy Summary
Looking for trading setups is a pretty common thing for many traders. The breakout strategy is a decent one for a few reasons:
- Increase in volatility when a low volume market meets a high volume market at London open
- Simple rules that you can follow
- Trends begin with breakouts and you could get involved with a moving market
- Two strategies – Fade the move or trade the general breakout strategy
As always, ensure you test out your trading rules including stop placements and profit targets.
For my U.S. traders, the London Breakout happens when you are sleeping. The rules that have been talking about here apply to moment the New York sessions opens alongside the London session.