The London breakout strategy for a morning trade, and New York breakout for afternoon trades (if you trade GMT), is a breakout from a support-resistance or square pattern. It is a price-action strategy.
There are as many variations of the trade as there are forex trainers and traders, but most are based on previous session volatility, breakout from the previous session trend high or low, and a limited period in which trading takes place. The strategy is named after the two market sessions in which it is traded, namely London and New York.
It takes advantage of the increase in trading volume after the London opening and the same at the New York opening.
The London breakout strategy
The strategy is based on the activity during the Asian session.
The Asian session, Tokyo and Sydney, is a more subdued trading session because the big markets are closed during those hours. This often leads to the Asian session ranging or coiling within a narrow range between lowest and highest price.
The London Strategy takes advantage of the breakout from this range which occurs when London opens. We don’t know in which direction the breakout will occur, but we know the increased volume that comes with the London open should move the market outside the Asian high or low.
What do the candles tell us? In the London Break-out Strategy, the candle that breaks the range, indicates that the ranging, coiling or indecision illustrated by the candles staying inside the high and low boundaries, have been broken and that a momentum is probably forming. (Momentum is the opposite of ranging)
There are no indicators to trade the London breakout, except the Asian low and high, but most traders have a time frame within which the trade must be done.
Pair: GBPUSD and EURUSD.
(Some traders experiment with NZDUSD) or AUDUSD or you could try EURGPB.
Time frame: One hour (H1) chart.
Risk: Your usual risk management rules apply.
Method: Draw lines on the lowest (support) and highest (resistance) levels of the last three candles of the GBPUSD during the Asian session.
Place a Buy Stop order around 2 – 5 pips, plus spread, above the resistance line.
Place a sell stop order 2-5 pips, plus spread, below the support line.
Once one of the orders are triggered, immediately cancel the other order.
Stop loss goes in the area of the opposing order entry.
Managing the trade:
Again, every trader manages the trade depending on their views of the market and their trading personality.
- You could enter the trade only after the London market has been open for at least 30 minutes, to avoid possible volatility spikes near the open of the session;
- base your target profit on the distance between the previous session high or low;
- base you target profit at 20 pips;
- base target profit at previous support/resistance;
- only enter trades where the Asian session movement is 20 – 50 pips on the H1 chart;
- when the trade moves to 1x risk, move the stop to break-even to avoid any loss;
- use a trailing stop of at least 1x risk;
- close the trade before the New York open;
- cancel the order if no order was triggered after 2-3 hours;
- only trade Tuesdays to Thursdays because of volatility on Mondays and Fridays;
- use the ATR as an indicator for deciding where to place stops;
- close the trade at the close of the session, regardless of where price is, or where you think it may be heading.
Possible drawbacks of the strategy:
- Because it is a popular strategy, it is easier for professional traders to put orders where they know the amateurs place their stops;
- you could get caught in a bull or bear trap.
Be aware of the possibility of a retest after the breakout.
The New York Strategy
The New York strategy is traded in exactly the same way as the London strategy, but based on the high/low of the London session at the New York open.
Some traders combine the London Strategy with a five candle breakout, but then it is not the London strategy but a London Five Candle Break-out Strategy (or whatever you want to call it).
Note: I don’t trade any of the strategies discussed. This is only information