Trading activity is traditionally divided into several sessions in the foreign exchange market. That’s related to real-money accounts which are intended to exchange currencies from import-export operations. The trading volume is not smooth throughout the day and there are spikes of activity. Most of the speculators take advantage of that, especially in London open as the Asian trading session is comparatively quiet, sharing slow-moving action. With the trading volume coming back to the forex market, volatility also grows, and currency pairs start moving. Volatility is the best friend of any forex speculator as it promises more profits. Based on that, the London Breakout Forex Strategy was developed.
Key factors to watch for London Breakout Trading Strategy
First of all, London Breakout Strategy Forex was made for trading on the British Pound versus the U.S. dollar. In some cases, such cross-rates as EUR/GBP, GBP/CHF and GBP/UAD could be also considered for trading. However, those options are available for experienced traders only as the approach requires a good knowledge of current fundamental situation for Euro, Swiss Franc and Australian dollar. Thus it’s better focusing on the GBP/USD currency pair as London trading session intersects with the New York open later in the day.
What is the best time to start trading?
A perfect moment comes when the Asian trading session is getting to the close, while London traders are just getting to their workstations, thus two or three hours after the London open are crucial for positioning as further price action usually does not give such attractive trading opportunities.
London Daybreak Strategy does not require any technical indicator to analyse the market. In most cases, pure price action is used to determine entry levels. The only exception might be a horizontal line to draw on the price chart as traders should determine high and low price levels which were charted during the Asian trading session.
What is the best timeframe to trade London Breakout?
The best trading results are usually achieved when speculators use the by-trend approach as standing against sharp price movements is dangerous. Therefore, large timeframes such as One-day and Four-hours charts should be analysed to determine the general long-term trend. On the other hand, short timeframes like 15- or 30-minute charts do not give enough information regarding the general trend, and they contain a lot of market noise together with false trading signals. Thus, the best timeframe to trade on London breakout is the 1-hour chart.
How to trade London Breakout Strategy
The main technique is based on forex breakout strategy, which suggests that if GBP/USD was trading in a tight sideways range during the Asian trading session, and breached a certain resistance or support level during the London open, then the price action would continue moving in the same direction throughout the day. Therefore, two horizontal lines placed at high and low price levels, which were printed in Tokyo, should determine the threshold of entering the market. For instance, if a high price of GBP/USD was 1.2250 in Tokyo, and the pair charted a peak of 1.2252 in London open, then the further price action should be bullish, and it’s worth opening long positions. At the same time, if a low rate was noticed at the level of 1.2238, and the Pound moved lower during the appropriate hours, then short positions would be reasonable. Here is an example, how to get ready for the London daybreak:
The main challenge is not to miss the price action and open trading positions in time as brokers might have a delay in executing orders, and the spread could influence the overall profit. Thus, special orders are used in London breakout Strategy forex.
Order types for profitable trading
After the peak and bottom of the previous action is determined, and two horizontal lines were drawn on the one-hour chart, it’s time to set entry points, as well as determine stop-loss and take-profits levels. There is a special type of orders in the forex market which are called postponed buy- or sell orders. The main idea is that the trading terminal opens positions automatically after a pre-set price level is reached. In this case, traders will need buy-limit and sell-stop type of orders as the strategy is based on the breakout. That means that traders need to buy GBP/USD after the price breached an upper mark, and sell the pair when the support was breached. At the same time, a situation could happen when the rate is extremely volatile in London, and both postponed orders are triggered. Such a position is called the lock, as traders have simultaneous positions in different directions with a fixed loss. In order to avoid that, traders should delete an opposite postponed order right after the first one was triggered. In addition, there is an option of setting if-done orders.
Setting if-done orders
When opening a postponed order (buy-limit or sell-stop), the trading platform offers an option of pre-determining stop-loss and take-profit orders for a case if the postponed order was triggered. This type of orders is called if-done, and it works as a usual set of stop-loss and take-profit orders. It’s highly recommended to preliminary determine those levels as some of the price action might be too quick for human traders to react. Thus, setting if-done orders, and the calculating potential stop-loss and take-profit distance is crucial for the money management rules. However, some of the forex traders use only a stop-loss if-done order, preferring to manually control the trading position if it comes in the right direction.
Trading on London Close and New York Open
The London Daybreak Strategy review says that the most efficient performance is achieved when trading positions are closed when the European comes to an end. However, the New York open comes when most of the London exchanges are still open. What’s more, fundamental events traditionally happen before the New York open, and most of them bring significant shifts to current investors’ and traders’ sentiment. Therefore, higher volatility could influence the price action, and some profitable positions might reverse and get back into negative territory or even trigger stop-loss orders. In order to avoid that, forex traders have two options. First, it’s highly recommended to close all trading positions for GBP/USD before North America wakes up. This is an option for beginners who do not feel confident in trading fundamentals. Second, traders could adjust their trading positions depending on the economic reports coming out at around 08:30 AM New York Time (01:30 PM London Time). But there must be a certain skill of trading fundamentals to know how to do that in the right way.
FinmaxFX is one of NAFD (National Association of Forex Dealers) initiators.
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