How to Trade the London Breakout – A Simple Opening Range Strategy

The London trading session is one of the most volatile and active periods for forex trading. The London breakout strategy aims to capitalize on the increased volatility during the first few hours when the London session opens. This simple yet effective strategy focuses on trading breakouts from the opening range of the London session.

What is the London Breakout Strategy?

The London breakout strategy involves trading breakouts from the opening range of the London trading session, which opens at 3 AM EST and runs until 12 PM EST.

Here’s how it works:

• Identify the high and low during the first hour of the London open (3 AM – 4 AM EST). This establishes the “opening range”.
• Place a buy stop order just above the high of the opening range. Place a sell stop order just below the low of the opening range.
• Target closing the trade at 3x the stop loss. The stop loss is placed just outside the opening range.

The first hour of the London session is often marked by increased volatility as traders react to fundamental news and events that occurred over the Asian session. The influx of liquidity and volume as London traders come online creates breakouts from the opening range.

The London breakout strategy aims to capitalize on these high probability breakouts from the opening range. By focusing on the first hour, you increase the likelihood of an opening range breakout as traders test the overnight liquidity.

Why Trade the London Breakout Strategy?

There are several advantages of using the London breakout strategy:

• High Win Rate – Trading in the direction of the overall daily trend around a clear support and resistance level leads to a high win rate for opening range breakout trades.
• Defined Risk – By placing stops outside the opening range, risk is limited on each trade. Traders know the maximum loss before entering each trade.
• Repeatable Process – The rules for the London breakout strategy are clear and simple to follow. This makes it easy to implement consistently.
• Efficient – Opening range breakouts occur quickly, allowing efficient trade entry. Stop losses and profit targets are placed quickly allowing for efficient risk management.
• Trades Daily Trends – Trading in alignment with the daily sessions captures moves in the dominant trend direction. London breakouts capture volatility spikes in trending markets.

When implemented correctly under optimal conditions, the London day breakout strategy provides a high probability setup for momentum traders with a favorable risk to reward ratio.

How to Identify the Opening Range

The very first step is identifying the opening range for the London session. Here are some tips:

• Use the 1 hour chart to identify the opening range.
• The open range is established during the first 60 minutes when the London session starts.
• Mark the high and low points during this first hour. This area constitutes the opening range.
• Draw a rectangle from the high to the low of the opening range. This visualizes the range to be broken.

When identifying the opening range, it is important to consider volatility and liquidity:

• Volatility – The open range must have sufficient volatility for a valid breakout. Avoid slow news days with narrow ranges.
• Liquidity – The optimal open range will have substantial volume and liquidity for a high probability breakout. Low liquidity increases the odds of false breaks.

Choose opening ranges with wide bands of support and resistance and high trading volume in the London session for breakout opportunities. Slow opening ranges without volatility should be avoided when trading London breakouts.

How to Draw Support and Resistance

Once the opening range is identified, horizontal support and resistance lines are drawn based on the range’s high and low.

• The support line is drawn along the bottom of the opening range rectangle.
• The resistance line is drawn along the top of the rectangle.

These support and resistance lines represent key breakout levels. The trade triggers will occur when price breaks above resistance or breaks below support.

It is crucial to accurately plot horizontal support and resistance lines for the opening range on your chart. The lines should be drawn from high to low of the range. Avoid angled or sloped lines. Get the horizontal levels exact.

Plot support and resistance based solely on the first 60 minute open range. Do not add additional lines from previous days. Trade the breakout from the current day’s opening range.

Placing Stop Losses

Once the opening range is marked, stop losses are placed just outside the high and low of the range.

• For a buy breakout, place a stop loss 1-3 pips below the low of the opening range.
• For a sell breakout, place a stop loss 1-3 pips above the high of the range.

Stops are placed beyond the range to prevent getting stopped out on price fluctuations within the opening range. This initial stop defines your maximum risk on the trade.

When setting the stop loss:

• Allow wiggle room beyond the open range for the stop to account for whipsaws and slippage on fills.
• But do not place stops too far from the open range, otherwise you risk giving back gains from a successful breakout.
• Consistently use the same pip distance for stops to eliminate guesswork. For example, always set stops 3 pips beyond the open range.

Accurate initial stop loss placement is crucial for managing risk on London breakout trades. Never enter a breakout trade without a predetermined stop loss.

Entry Order Types

There are two types of entry orders used to trade opening range breakouts:

Buy Stop Entry – A buy stop order is placed just above the high of the opening range. This triggers a long trade when the price breaks above resistance.

Sell Stop Entry – A sell stop order is placed just below the low of the opening range. The short trade is triggered when the price breaks below support.

Stop entry orders allow you to predefine both the breakout level and stop loss level prior to entry. This eliminates subjectivity for entry and ensures breakouts are traded swiftly and systematically.

When placing entry stop orders:

• Try to anticipate breakout levels and place pending orders early, but avoid placing orders too far from the open range.
• For high volume pairs like EUR/USD aim for 2-4 pips beyond the range for entries. For lower volume pairs use a wider 5-10 pip entry.
• Be swift in trade execution. The best profits are made entering within the first minutes of the breakout’s occurrence.

Entry stops automate and systematize trade execution for opening range breakout strategies. Use them to ensure breakouts are captured quickly and efficiently.

Profit Targets and Trade Management

To complete the London breakout strategy, you need to define profit targets and implement risk management techniques. Here are some guidelines for managing open trades:

Profit Targets – The most common method is to target 3x the risk, or 3x the stop loss size. For example, a 10 pip stop would lead to a 30 pip profit target. Targets can also be based on technical levels or recent price swings.

Trailing Stops – Trailing stops should be implemented to lock in profits as the trade moves favorably. This protects a portion of gains while still aiming for larger targets.

Partial Profits – Consider closing portions of the position at incremental profit milestones, such as 50% and 75% of the intended target. This realizes gains while letting profits run.

Time Stops – For breakouts that stall, employ a time-based stop loss if the target is not reached within a reasonable period, such as 2-3 hours after entry.

Momentum Indicators – Adding oscillators like the MACD or RSI can provide clues on trade direction and momentum for exiting breakouts. Use them to aid trade management decisions.

The initial profit target depends on your risk tolerance and market conditions. Whatever system you choose, be sure to actively manage open trades with stops and limits to optimize performance.

Best Practices and Tips

Here are some additional best practices for effectively trading the London breakout strategy:

• Trade with the trend – Look for opening range breakouts that align with the daily chart’s overall trend direction. This puts the momentum in your favor.
• Trade breakouts quickly – Don’t hesitate on entry orders. Execute swiftly on the open range break to maximize the opportunity.
• Be selective on pairs – Stick to pairs with adequate London session range and liquidity. EUR/USD and GBP/USD are good options.
• Use limit orders – Consider using limit orders to ensure guaranteed entry on volatile breakouts at desired levels.
• Know when to avoid – Monitor the economic calendar. Low volatility news events can lead to choppy false breakouts.
• Have a risk plan – Determine your acceptable risk-reward ratio for trades and stick to proper position sizing.

Take advantage of opening range breakout opportunities, but be selective and meticulous in your technical analysis. A disciplined, calculated approach is key to successfully trading London session breakouts.

London Breakout FAQs

Here are answers to some frequently asked questions about the London breakout strategy:

What time frame should be used for the London breakout strategy?

The 1 hour chart is the most commonly used time frame to trade London breakouts. The one hour chart clearly shows the open range established during the first hour of the London session, allowing for accurate range and breakout identification.

What is the best trading pair for London breakouts?

The EUR/USD and GBP/USD are reliable pairs to trade London breakouts due to high liquidity during the London session. Other good options are EUR/GBP, EUR/CHF, and GBP/CHF. Avoid illiquid pairs or pairs with limited London session range.

Should you trade London breakouts during high impact news events?

It is usually best to avoid trading London breakouts when major news events and data releases overlap with the London open. High impact events increase volatility and the odds of false breakouts. Monitor the economic calendar when planning breakout trades.

Is it better to trade London closing range breakouts?

While popular, the London closing range breakout is less reliable than the opening range breakout. Volume and volatility tend to be higher on the open, leading to more defined support and resistance levels. The closing range has a higher chance of false breaks.

Can you combine other indicators with the London breakout strategy?

Yes, the London breakout can be combined with indicators like the RSI, stochastic, MACD, or moving averages to confirm momentum. But keep it simple – let the opening range breakout be the primary trade trigger, using indicators only for confirmation or trade management.

Is the London breakout strategy suitable for beginner traders?

The London breakout can be suitable for beginners due to its rules-based process, defined risk, and technical simplicity. But as with any trading strategy, beginners should thoroughly backtest and practice proper risk management when applying the London breakout.

Conclusion

The London breakout is a straightforward momentum strategy that allows traders to take advantage of the increased volatility when London market participants come online. By focusing on clear support and resistance levels just after the open, traders can ride opening range breakouts in the direction of the daily trend.

To trade London breakouts effectively, pay close attention to range identification, breakout timing, and risk management. Use tight stops, place entry orders swiftly, and target 3:1 reward/risk ratios or greater. With the proper disciplines, the London breakout can produce a favorable win rate with well-defined risk on daily range-bound pairs.

This simple but robust strategy is ideal for short term traders looking to capitalize on London’s trading session volatility. Learn to properly identify the open range, set precise stops, and swiftly execute entry orders, and you can profit from the influx of volume when London begins trading each day.