Did you know that nearly 30% of all forex transactions take place in the London trading session? Although several other European forex markets open along with London, the latter is the busiest and most popular centre. These trading sessions open around the time when several Asian market participants are getting ready to close shop. The factor that makes London the most popular and busiest trading session is its overlap with both the Asian and the New York sessions.
The massive volume of transactions in the London session ensures high liquidity and lower transaction costs or lower pip spreads, thereby attracting more and more traders. But, it is also the most volatile session, witnessing the beginning of most trends that continue until the beginning of the New York session. So, how do you trade in this session and what type of trading strategy should you consider using? Let’s find out.
The London Morning Breakout Strategy is designed to take advantage of the sudden increase in trading volumes from institutions close to the London opening time. The strategy aims to take advantage of the pent-up energy from the Asian session, and its use at the right time is important. This strategy is ideal for traders who are intraday scalpers and focus on capturing a small move in prices, rather focusing on trends or swing trading.
While there are no special trading indicators needed to trade the breakout at the London open, it is advisable to use this strategy with a one-hour time frame. Again, while one can trade in any currency pair during this session, it is best to stick to major pairs like the EUR/USD, GBP/USD, USD/JPY and USD/CHF, or choose a currency pair where at least one of the currencies is European.
Traders can modify this strategy according to their preference. The basic requirement for this strategy is that a trader is able to draw horizontal lines on the forex chart to identify the horizontal support and resistance levels.
Since we usually enter the London session in a range, an entry point is already available. So, what needs to be done is the drawing of a support and resistance line around the last three candlesticks that formed in the Asian session. This is done by identifying the three previous candlesticks formed in the Asian forex trading session. The high and low of these candlesticks form the breakout levels.
Now, draw a horizontal line on the highest point of these three candlesticks. If the price breaks above this line, it is a buy signal. Similarly, draw a horizontal line on the lowest price point between the three candlesticks. If price breaks below this line, it is a sell signal.
The next step is to place two opposite pending orders, a buy stop order and a sell stop order, at the same time, since the aim is to catch a breakout either up or down. The buy stop order should be placed 1-2 pips above the top horizontal line, while the stop loss should be placed at least 5 pips below the lower horizontal line. For the sell set up, place a sell stop order 1-2 pips below the low of the lower horizontal line and stop loss at least 5 pips above the top horizontal line. Now wait for the price to activate one of these two pending orders. As soon as one is activated, you need to cancel the other pending order.
The trade can be managed by moving the stop loss to break even if price moves more than what was risked initially. Another option is to use trailing stops to lock in profits.
Now, the question arises as to when to close the trade. The answer is at the end of the London trading session. This means that even if you have a loss at hand, the trade should close. A trader should never hang on to his/her trade in hopes of earning a few more pips in the US trading session.
To conclude, the London Morning Breakout Strategy is simple to understand, since no indicators are required. A simple price action trading system that can easily be implemented by even novice traders, this strategy can, however, lead traders into a bull or bear trap. Also, some odd price action may be witnessed on Mondays and Fridays, so traders need to be extra careful on these days.
If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Trading leveraged products involves a high level of risk. You may lose more than your invested capital.