AtoZ Markets - Today we will be discussing the London Breakout Forex Strategy - one of the most useful and practical breakout trading strategies. This strategy is specifically designed to benefit from a sudden spike of trading volume near the London Open session.
Why was the London Breakout Forex Strategy created?
London is known for its position in the global dominant Forex center, London is also the center for all Forex trading activities during the European session. As the strategy name implies, the concept behind the London breakout strategy lies in the crossover of the Asian session and the London session. This strategy is one of the easiest and simplest strategies in the Forex market.
The London session is known to be the start of strong volatility as London is one of the biggest capital markets in the world. This is because the beginning of the London session is also the end of the Asian session.
Right before the London open, the Asian markets are beginning to close down, square-off their open positions, and avoid big position trades knowing that the London open’s volatility might affect their positions prior to finding its direction.
Whilst, during the London open hours, a sudden spike in volatility occurs causing momentum in the forex market. Hence, this strategy was created to take advantage of the steep spikes in the early hours of the London session.
Like the Breakout trading strategy? Try it with an AtoZ Approved broker for free:
Basics of the London Breakout Strategy
Now let's move on to the basics of the London Breakout Strategy. AtoZ Markets team has outlined below the key elements you should know about this strategy:
- The London trading session is the biggest market mover for the Forex market and the London breakout strategy aims to benefit from the steep spikes during the first few hours of the London session. To be more precise, 1 to 3 hours after the London session starts.
- In order to properly utilize this strategy in your favor, you will need the basic skill to draw horizontal lines and a couple of hours of free time during the London session.
- The London Breakout Strategy is usually traded on the 1 hour time frame
- The London Breakout Strategy is traded majorly with GBPUSD, but other financial instruments can be used as well, which AtoZ Markets team has listed in the next section of this article.
- A trader does not need an indicator for London Breakout Strategy. If you still want to use one, then the MT4 FX trading session indicator could be used.
- In terms of risk management, a trader is recommended to the risk per trade between 1% to 2% of your total funds.
Best instruments for London breakout FX strategy
The London breakout FX strategy works well on the E-Mini Dow Jones Futures from the Chicago Board of Trade (CBOT.) Furthermore, this strategy will work well in the following currencies, such as:
- Euro
- Pound Sterling
- Swiss Franc
- US, UK, and European Futures instruments.
It is always important that you should try it out on a simulated platform before committing any real money to the strategy.
In order to catch the right moves during the London Open, you will not need any specific indicators. However, one thing is strongly recommended – use a one-hour Forex chart. Moreover, you will need to use proper risk management techniques. As for the currency pairs, you can focus your attention on:
- GBPUSD,
- EURUSD,
- and NZDUSD.
How to trade with the London Breakout Forex Strategy?
As we are coming to the London session in a range, we already have an entry point due to that range. In order to trade the London Breakout Forex Strategy, you need to follow the next steps:
- First, you need to draw support and resistance lines around the last 3 candlesticks that have appeared in the Asian session for the pair you are trading (for example, GBPUSD);
- Then, place a buy stop order approximately 2-5 pips above the resistance zone;
- Afterward, place a sell stop order approximately 2-5 pips below the support zone;
- Once the order is active, cancel the other pending order;
- Finally, place your stop loss in the place of the previous order.
Trend direction of GPBUSD after the London session
In most cases, the trend direction of GBPUSD, or other instruments, in the first 1-3 hrs of the London session, determines the remainder trend direction of the currency pair in the rest of the London session or even the US trading session.
Another factor you should consider ahead of the London session is the Frankfurt session. This is another big market that opens an hour ahead of the London session. The opening of the Frankfurt market causes a minor wave of volatility before the big wave that London brings.
It somehow widens the range, making returns a little bit lower. In some cases, if the Frankfurt open caused to wide of a range prior to London open, it is best to stay out of the market as much of the possible move might have already been made by the market.
Try the London Breakout Strategy with an AtoZ Approved broker for free:
Pros and Cons of London Forex Breakout Strategy
Pros of the London Breakout Strategy
- You don't need indicators
- Easy to understand and implement
- A price action trading strategy
Cons of the London Breakout Strategy
- Potential to get caught up in the bear or bull trap
- It might be tricky to trade with this London Breakout Strategy on Monday or Friday. These days tend to bring some odd price action during the market close/open hours.
If you want something more easy to start with rather than the London breakout strategy? There are lots of other Forex strategies that would allow you can choose from. Most trading strategies, even the simple ones, are good enough for you to start your Forex trading journey, as it could let you make decent profits while learning how to properly analyze charts.
Should you use this breakout Forex strategy on your own at all?
Before you start trading with this London Breakout Forex Strategy, you'll want to read this.
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So what is your opinion of the London breakout strategy, is it a strategy that you would use? Let us know in the comment section below.
This article was updated on 27 September 2019 by Amandeep Sonewane