London Open Breakout trading strategy

Many traders around the world consider the opening of the financial markets in London as the beginning of a new trading day. During the first hours of the day (usually) there is a strong increase in activity on the Forex markets. The London Open Breakout trading Strategy from Globaltrader24 helps you take advantage of this. (More about break out trading)

The rules

In order to apply this strategy it is necessary that the nightly range (also called Asian Range or Tokyo range) is in a narrow band. The price movement between 22:00 GMT and 06:00 GMT for a currency pair may not exceed one third of the average daily price change. For example, the EURUSD (euro dollar) currently has an average price range of 137 pips over the last 30 days, the Asian range should then be smaller than 45 pips in order to apply the London Open Break Out method. The upside potential is then still around 80 pips. The smaller the Asian range, the greater the potential profit during that day.

If the Asian range is larger than 1/3 of the daily average range, this indicates that the price is very volatile at that moment, and applying the London Open Break out strategy is not suitable in such market conditions.

The average daily range can be found on this website:
http://www.global-view.com/forex-trading-tools/chartpts.html
Just scroll down until you see this part of the table:

Forex chart setup:

Ok, it’s early in the morning, 7:15 am, you have just finished your first cup of coffee and you are looking at the Forex markets. What does the Asian range look like, see figure 1 (example is the GBPUSD of Friday 19-03-2010):

1. Set you chart at the 15 minute timeframe (each candle represents the price movement for 15 minutes), candle sticks, and zoom out so that you can see the entire previous night on your screen.

2. Now place two vertical lines (timelines), one at 22:00GMT of the previous night and one at 06:00GMT this morning.

3. Now place a horizontal (Resistance) line on the highest peak that you see between the two timelines (upper horizontal red line).

4. Now place a horizontal (Support) line at the lowest value you see between the two timelines (lower horizontal red line)The vertical distance between the two horizontal lines represents the “Asian Range”.

5. Measure the Asian range between the two horizontal lines; either manually or using metatrader.

In metatrader4: left click on the “Crosshair” button, in the “Line study” toolbar. Left click and hold the crosshair on the upper horizontal line, then hold and drag to the bottom horizontal line and read the MIDDLE number at the cursor. This is the distance in pips between the two horizontal lines. In figure 1, that is 32 pips. The average daily range is approximately 170 pips for the GBPUSD. Thus, the Asian Range is well below the 1/3 limit to use the London Open Break Out strategy.

The signal

Now that you know that you can use the method, you need to wait until a 15 minute candle from the Asian Range breaks AND CLOSES outside the Asian range.

The latter is a very important rule and applies to ALL break out methods. A price is only considered to have broken a resistance or support level if a candle CLOSES below or above such level.

Sometimes a price breaks through the Asian range, but almost immediately pulls itself back within the Asian range and therefore does NOT give a signal to open a position! This is often referred to as a failed breakout. You should wait until a candle is closed. I have often seen a price just break through the Asian range, but then certain news is published and in a matter of SECONDS the price moves back the other way! Waiting is the trick… Been there done that!

Figure 1 shows that quite quickly after the Asian Session the price of the GBPUSD breaks through the Asian range at the bottom and closes about 30 pips below it. This is the signal that we are going to open a SHORT (sell) position. In case the price exceeds the Asian range, you would open a LONG (buy) position.

But not quite yet! Almost in all cases a price temporarily reverts to the Asian range, or at least close to it. We therefore wait for a Pull Back, or Retracement. The advantage of this is twofold; you can make about 30 pips extra profit, but more importantly you can keep your risk much smaller, thereby maintaining a higher risk / reward ratio. In the example, the GBPUSD behaved as expected and the price went back nicely to the Asian range.

Now we do not wait until the candle is closed. As soon as the price has reached the Asian range again we open (in this case) a short position. In the example this happened around 8:30 in the morning. I can imagine that you cannot wait that long because you need to go to work or to school, but there is a solution.

As soon as you see during breakfast that the price has broken and closed outside the Asian range, you can open a PENDING ORDER, in this case a SELL LIMIT order. With PENDING ORDERS I always take a safety margin of 5 pips so I put a PENDING ORDER 5 pips under or above the Asian range. As soon as the price hits the price level you set the pending order, the position is automatically opened.

Two great brokers that provide the possibility to trade with pending orders are Plus500 and Markets.com

Risk warning: ‘CFD Service. 80.6% lose money’

Stops

The next question that is looming is where to place the stop loss.

In many cases, a 55 EMA of 200 EMA (EMA = Exponential Moving Average) is rather close. In those cases, just put the stop loss 10-15 pips on the other side of these EMAs.

If there is a strong trend line within the Asian range, then place the stop 10-15 pips beyond this trend line.

If there are no indicators in the vicinity other than the Asian range itself, then place the stop loss 10-15 pips on the other side of the Asian range.

Exit strategy

Determining when to exit the trade is just as hard as determining when to enter a trade. A good exit strategy is therefore very important.

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I always split my trade-setups in two, so instead of 1 trade of 0.1 lot, I open two trades of 0.05 lots. On the first half I always try to make a small profit of about 30 pips. Once this “First Target” is reached (closed with profit), the stop loss of the second half of the setup goes to “Break Even”, which is the opening price plus the spread. From that moment on I am certain that I have made at least a small profit and the second half of the trade has the potential to turn into a larger profit.

You can now do several things:

1. You leave the “Take Profit” of the second half open, so that it has the chance to catch a big trend, which may last for a few days, and thereby possibly make a profit of a few hundred pips.

2. You place the Take Profit at a logical price level, e.g. an ema, trend line, support resistance line, double bottom / tops.

3. You closely monitor the trade and as soon as a 1H candle closes and the 5 ema crosses the 8 ema, you close the trade because this is a signal that the (temporary) trend has been reversed.

4. You place the take profit on the average daily range. In the example you would have set the take profit at 170-32 = 138 pips.

I prefer method 3 because it gives the trade the chance to pick up a long trend. If the trade survives a day, I start looking at the 4H candles and I use the 5-8 cross on the 4-hour chart. If the trade survives the second day, then I start looking at daily candles and I move my stop to 5 pips plus spread above or below the daily high or low of the previous day.

That is how I move the stop every day along with the trade, until the trend reverses and the trade is stopped out. Sometimes this allows you to make hundreds of pips in profit with trades that sometimes stay open for weeks at a time … and that with a risk of only 30-50 pips! You only need a couple of these trades to make serious money!