The London Breakout strategy is a day trading technique that takes advantage of the trading range before the opening of the London session. As London is in a different time zone, the market opens several hours before NYSE. This provides traders with a unique opportunity to enter into new positions. The basic idea of the London breakout strategy is to find a ranging market before the London session starts, then open a long position if the price breaks above the resistance line of the range or open a short position if the price breaks below the support. While this seems simple, you still need to be wary of fake breakouts that might occur when smart money is in play. However, this can actually be a strategy on its own if you know how to read the signs and enter the market at the right time.
What is the London Breakout trading strategy?
The forex markets are based on three main trading time zones; the Tokyo session, the London session, and the New York session. The first hour of trading has a lot of activity.
The trading volumes also increase significantly due to the overlapping of the Tokyo session’s close and the open of the London trading session.
With the London breakout trading strategy, a trader can take advantage of the increased volatility in the markets. By applying this trading strategy, a trader can be built a consistent trading income within a few hours. Another advantage of this trading strategy is that you can also customize it the way you want.
A keynote to include is that the London breakout trading strategy is not always successful. Besides the technical aspects of the London strategy, a trader should also pay attention to the news that comes during this session.
With the increased volatility, the London breakout trading strategy is a helpful trading strategy.
How to use the London Breakout strategy?
In the London breakout trading strategy, traders need to trade the breakout from the Asian session during the London trading session. A useful way to do this is by applying different indicators or building a trading system.
The key point of this trading strategy is that a trader needs to focus on the short-term price movements that come with the London Breakout strategy.
One method to make the London breakout trading strategy more effective is to wait for a retracement. This is considered by some to be a more productive way to trade the London breakout strategy. However, it requires traders to wait until the retracement occurs. And the retracements can appear at any time of the day.
Traders in this instance would wait for the price to breakout from the range and then close outside the range. Once this happens, a trader can place a pending order at the breakout price with stop-losses at the nearest swing high or low, and then set the target to the previous candlestick’s low after the initial breakout.
Typically, a breakout refers to any price movement beyond or below a defined level. There are two primary levels in trading, namely the support level and resistance level. The former category refers to a price below which an asset, in this case, a currency pair, does not fall for some time. A line drawn along the lowest lows helps identify the support level.
In terms of the currency pairs that a trader can trade, the GBP/USD is one of the most traded pairs during this session. Traders can also look at some cross currency pairs, such as the GBPJPY. The GBPJPY pair is known for its volatility. This creates a lot of trading opportunities for the trader. Moreover, because the London breakout trading strategy focuses on the Asian and the London session, it could make sense to trade the GBPJPY currency pair when using this method.
The London trading session starts at 7 AM GMT. Therefore, the time between 7 AM and 8 AM is when a trader can enter the market. Whenever the prices break any of these two levels, volatility will likely increase, resulting in the price movement along the breakout’s direction. This is why it is important to await confirmation, e.g. by looking at the level of trading activity.
When trading the London breakout trading strategy, the main thing to remember is that it’s not just a breakout system. Traders should also focus on upcoming trends. The term breakout is said in the short-term perspective (last few hours of the Asian trading session close and the opening hours of the London trading session).
London Breakout strategy conclusion
The London Breakout trading strategy is particularly suited for day traders and intra-day traders. This strategy a simple way to trade the forex markets. Using the time zones and the breakout, traders try to ride the market wave that appears when the Asian session and the London session overlaps.
Accordingly, the London breakout strategy capitalizes on the increased trading activity recorded during the first hour of trading. Therefore, this strategy is also known as the London open breakout strategy or the London daybreak strategy.
It is always advisable to test these strategies on a demo account first by following the game’s rules. This strategy’s crux is finding out the proper breakout and checking whether the currency is volatile enough or not. Most forex brokers will offer a free demo account where you can practice your trading strategies risk free.
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