The London Day Break Strategy is a simple intraday trading strategy that utilizes the London open session which often runs for three hours after the London market has been opened. It is a useful and profitable strategy which focuses on making the most of the sudden spike of trading of the London open session.
Usually, the European session is characterized by a high volume of trading regarding price action, liquidity, and volatility. Therefore, traders look to make use of the bond market that occurs during the Asian session (takes place before the London session). With a surge in the trading volume, you can get involved in the trade before things normalize again.
The breakout strategy is quite simple and doesn’t take much time. Unlike other day trading techniques which demand that traders to be constantly glued to their screens, this one will only take about 15 minutes of your time.
If you are interested in learning more about the profitable London Day Break Strategy, you are in for a treat. You’ll acquire some knowledge about how to trade, pros, cons and a few tips of success.
How Does The Strategy Work?
The London breakout strategy utilizes two technical indicators: 50 EMA and MACD. Most people prefer the MACD which is basically a momentum indicator that follows trends. As a result, it helps traders confirm and identify that the London open breakout possesses enough fuel and inertia to follow the direction of the breakout. Momentum strategies in general call for a high-level of discipline on the part of a trader. So, if you want to go this route, you must devise clear-cut trading rules that will help you stay well above your doubts and fears. Otherwise, stick with the 50 EMA.
If you want something easy to begin your trading journey, the London breakout strategy will take care of you. Although simple, realize that it not accurate. It is only a great way to launch your craft as it could let you make a profit while teaching you how to accurately analyze charts.
Here are some of the benefits of the strategy;
- You don’t need any indicator to make successful trades
- It is quite easy to master
- Uses a unique strategy of price action
Like most trading strategies online, the London Day Break strategy has a few disadvantages of its own. They include the following:
- It can get make get tied up in the bull or bear trap
- You might have a hard time trading on Mondaysand Fridays. These days have a tendency of throwing an odd price action when the markets are closed or opened hence making the market super slow.
How to Trade the London Breakout Strategy
Step 1: Prepare Your Charts
Before you begin trading, take some time to put your charts in order through the following actions:
- Ensure you are online when the London market opens at 7:00 GMT
- Trade the major pairs only (EUR/JPY, EUR/USD, GBP/USD, and EUR/JPY). These have low spreads hence infrequent price spikes.
- Hourly candlestick chart
- Include a 50-SMA.
Step 2: Understand where to place your trades
Next, you need to know where to position your trades to reap maximum returns. Here’s a guide on how to achieve this:
- Find 3 candlesticks from the just ended Asian session
- Identify the high and low of each of the candlesticks
- Draw a horizontal line on the highest price point of these candlesticks. You score a buy signal the moment the price breaks above the line.
- Draw another horizontal line on the lowest point between the candlesticks. You score a sell signal when price breaks below the line.
Step 3: When to Buy
As mentioned, a buy signal comes when the price goes above the horizontal line. So, if the next candlestick surpasses the highest high of all the previous 3 candlesticks and if the price is higher than the 50SMA, it’s a perfect opportunity to go long on the pair. In such a case, place your stop loss just below (at least 5 pips) the lowest low of the previous candles.
Step 4: When to Sell
If the price is lower than the low of the range and is also below than the 50-SMA, it is a clear indication that you should take a short trade. Place your stop loss at a maximum of 5 pips above the top horizontal line.
Pro Tip: Wait until price has activated any of these pending orders. Once you are in the clear, cancel the other pending order.
Step 5: Closing Your Trade
The London breakout trading can be quite addictive as is the case with other trading strategies out there. Some traders are notorious for leaving their trades hanging with the hope that they will score a few more pips once the US trading session opens. This is a bad move. Follow the system even if it means you have profit or loss. Close all your trades at the end of each London trading session.
Tips on How to Manage Your Trade
Here are some ideas to explore when managing your trade:
- If price goes above twice the amount you had initially risked, move your stop loss to break even. For instance, if your stop loss in 20 pips and the price goes to 60, you can adjust your pips to break even.
- Use trailing stop to secure your profits as the trade favors you
- The best trailing method is adjusting your stop loss behind the low point (swing high) as price moves in your favor. This reduces the likelihood of your trailing stop being prematurely hit.
The London Day Break Breakout Strategy allows traders to keep up with the intraday trend by making the most of the price variance between Asian and London sessions. Although simple to use, you need to master the basic trading tactics including dancing to the tune of the trend, reducing your losses and riding your winners. These are the things that will give you the best experience with the breakout strategy and make you boatloads of money in the process.