London Breakout Strategy: Definition and Usage

The London session in the Forex market presents opportunities for traders, as it is one of the most active periods of the day. The session is particularly important because it overlaps with both the Asian and U.S. markets. This overlap leads to substantial liquidity flow and major price movements.

That is why traders want to capitalize on the London opening by using breakout strategies.

In this article, we will explore the core principles of the London breakout strategy, how to apply it, and key considerations for successfully utilizing it.

What is the London Breakout Strategy?

The London Breakout is a forex trading strategy that aims to take advantage of the high liquidity and volatility during the opening of the London session. This method is typically based on the assumption that strong price movements will occur in the early hours of the trading day.

The opening of the London session coincides with the overlap of the Asian and U.S. markets, often leading to significant price breakouts. The London Breakout Strategy focuses on price movements that break out of a defined price range established in the early hours. Traders aspire to open positions when the price breaks either above or below this range, targeting quick profits.

Why does the London Breakout Strategy Work?

The main reason the London Breakout works is that the London session is one of the most liquid and high-volume time periods in the Forex market. When the London session opens, the Asian market has not yet closed, and the European market opens while the U.S. stock market prepares to start trading.

This high liquidity and trading volume lead to sudden and strong breakouts in price movements. Particularly in the early hours of the day, when certain price ranges are broken, it provides buying or selling opportunities for traders.

Additionally, during the London session, large financial institutions and banks are actively trading. This makes price movements more pronounced and helps trends form more clearly.

Forex Session Times

By reviewing the table below, you can see the forex trading hours and better understand why the opening of the London Session is so important:

How to Trade the London Breakout Strategy?

• Before the London session starts, a specific price range is typically formed during the last hours of the Asian session. This range includes the highest and lowest prices observed in the morning. The price range is used to identify potential breakout levels at the London Open. 
• When the London session opens, wait for the price to break out of this identified range, either upwards or downwards. If the price breaks upwards, you can open a buy position, and if it breaks downwards, you can open a sell position. 
• After the breakout occurs, be sure to set your stop-loss level to minimize risk. Typically, the stop-loss is placed on the opposite side of the price range. Take-profit levels are determined based on your risk-reward ratio, often targeting a specific pip amount. 
• When the price breaks out, you can confirm the signal with other technical indicators, such as RSI or MACD.

London Breakout Strategy Example

In the above chart, we see a price movement representing the London Breakout Strategy:

• Before the London session starts, the price is trading between 1.2050 (support level) and 1.2085 (resistance level). This range reflects the price action during the final hours of the Asian session.
• As the London session opens, the price breaks above the 1.2085 level, signaling a buy position.
• In this scenario, the stop-loss can be placed at the opposite end of the range, at 1.2050, for risk management. Additionally, a take-profit strategy can be developed with a specific pip target based on the risk-reward ratio.

Advantages of the London Breakout Strategy

• The London session is one of the most liquid periods in the forex market.
• Large price breakouts frequently occur at the London open, providing traders with the potential to achieve huge gains.
• It is generally suitable for investors seeking short-term profits. Day traders can make quick trades during the day with this strategy.
• The strategy offers clear buy and sell signals by breaking a specific price range, helping traders avoid uncertainty.
• It can be used alongside other technical indicators like RSI and MACD, allowing traders to obtain additional signals to support their decisions.

Risks of the London Breakout Strategy

• The London Breakout Strategy is applied during high volatility periods. However, this can lead to unexpected price movements and losses.
• If the price breaks out of the defined range but the trend doesn't continue, traders may face false breakouts.
• The strategy is suitable for intraday trading but may be too risky for long-term investors.
• Inexperienced traders may make mistakes while applying this strategy.
• To successfully implement the strategy, careful risk management and proper stop-loss levels must be set.

More About the Strategy

What are the best Forex pairs for the London Breakout Strategy?

The best currency pairs for the London Breakout Strategy are those with high liquidity and trading volume. Typically, major currency pairs such as EUR/USD, GBP/USD, EUR/GBP, and USD/JPY are well-suited for this strategy.

How effective is the London Breakout Strategy?

The London Breakout Strategy can be highly effective when implemented correctly. To get the best results when using this strategy, focus on trading during periods of high volatility, as it tends to perform better under these market conditions.

Can the London Breakout Strategy be used only on currency pairs?

While the strategy is most commonly applied to currency pairs, it can also be adapted to other financial instruments with high liquidity and volatility. However, each market may require adjustments to the strategy.

What profit targets should be set when using the London Breakout Strategy?

Profit targets are generally determined based on the risk-reward ratio. When a breakout occurs, traders can set a specific pip target for when to close their position. A 2:1 risk-reward ratio is often considered suitable for this strategy.