Below we take a look at the London Daybreak Strategy – including the significance of the London trading session – and provide two separate examples for buy and sell trades.
London Trading Session
The London trading session is one of the most anticipated trading sessions. Historically, London has always been a major trading hub, and even today approximately 40% of all Forex transactions take place during the London session.
The session is sometimes also called the European trading session. That’s because other major financial hubs in Europe like Zurich, and Frankfurt open around the same time. The London session overlaps with the closing of the Asian session and the start of the American session.
Trading Activity in the London Session
The trading activity reaches its peak during this session. The opening hours have the highest volatility, and generally the high or the low of the market is created during these hours.
It happens because most of the institutional traders, banks, and other significant market players place their trades around the start of the London session. The other reason for the high volatility is the Asian traders who square off their positions to avoid unexpected movement during the London session.
The high volatility and increased volume attract traders across the globe and make the London session extremely lucrative. It is the reason for having so many strategies associated with the London trading session.
One such strategy is the London Daybreak Strategy, also known as London Breakout Strategy. The strategy has been around for years and has many variations. However, The essence remains the same. Let’s go through the strategy details and understand it using a couple of examples.
London Daybreak Strategy
The London daybreak strategy is a short-term or simply a day trading strategy. The strategy is based on a breakout from the previous trading range established during the last Asian session.
The concept is that the Asian session has very small liquidity, and the price moves in a narrow trading range. The market has no drive to move beyond the narrow range.
However, when the London trading session starts, traders from London and other European markets also join and It builds up the liquidity. The idea is that the first price impulse at the start of the session sets the price direction of the entire session.
So the price is likely to rise if the initial impulse breaks the upper trading range of the previous Asian session. Likewise, the price is likely to drop if the initial impulse breaks below the lower trading range.
It is a fairly simple idea to determine the future price direction. Now there are a couple of ways to implement the London Daybreak Strategy. One of the ways is to set the chart interval to 1 hour and find the trading range from the last 6 candlesticks of the previous Asian session.
The most basic method to determine the trading range is to draw a price channel using the highs and lows of the last four candlesticks. Once the range is established, the idea is to wait for a breakout around the start of the London session and place the trades in the direction of the breakout.
If the price breaks the upper range, traders take a buy (long) position. Likewise, if the price breaks the lower range traders take a sell (short) position. The right way to enter the trade is by using the sell stop and buy stop orders. In a long trade setup, the stop-loss is placed a few pips below the lower trading range.
Likewise, in a short trade setup, the stop-loss is placed a few pips above the upper trading range. In both cases, the take profit is usually double the size of the stop-loss. However, many traders also rely on the price action to determine the take profit level.
The other way to use the London daybreak strategy is to set the chart at the two-hour interval and use the first candlestick of the London session to determine the trading range.
A buy trade is placed when the price on the next candlestick moves above the high of the first candlestick. Likewise, a sell trade is placed when the price drops below the low of the first candlestick. The stop-loss and take-profit setup remain the same as in the first method.
To understand the London Daybreak strategy, let’s take the example of the following GBP/USD Chart. The chart is set at a 1-hour interval and the narrow trading range in the Asian session is highlighted using two parallel trend lines.
The candlestick that closed below the narrow trading range is the first candlestick of the London trading session. Based on our strategy, the closing of this candlestick indicated a further lower move. A sell trade is taken immediately after the breakout and the stop-loss is placed above the trading range of the Asian session. Following the indication from the first candlestick of the London session, the pair continued to drop in the coming hours.
Now let’s take the example of a buy trade using the London Daybreak Strategy from the following GBP/JPY chart. The chart is set to a 1-hour interval and you can see the highlighted narrow trading range in the London Session. The trading range is determined using two parallel trend lines.
The candlestick that closed above the trading range of the Asian session is the first candlestick of the London session. The breakout above the Asian trading range indicated a positive outlook for the pair in the ongoing session.
Following our strategy, a buy trade is immediately placed after the breakout. The stop-loss is kept just below the trading range of the Asian session. Following the indication from the first candlestick of the London session, the pair continued to rise in the coming hours and gained well above 100 pips before the closing of the session.
London Daybreak Strategy Rules
- Always chose a trending pair to use the London Daybreak Strategy. The preferred pairs are GBP/USD, EUR/GBP, and USD/JPY.
- Do not take an entry before a clear breakout from the Asian trading range.
- The Strategy is for day trading and the trades should be closed on the same day.
- The stop-loss distance should be at least 10 pips away from the high or low of the previous trading range.
- Do not move the stop-loss to breakeven instead use a trailing stop-loss.