Forex Trading Strategy: London-New York Breakout
In today’s article, we will discuss a forex trading strategy that is quite simple to follow. In spite of it's simplicity, it stands out as one of a few trading strategies that can deliver profits over the long term. In a nutshell, it is an intraday strategy which aims to pick a few pips with clear-cut instructions for entering and exiting a trade.
This forex trading strategy is built specifically to trade the breakouts that occur in two overlap zones: the London/Asian overlap and the London/New York overlap zones.
Forex is a 24 hour market. However since no human can stay awake for 24 hours from Monday to Friday [unless you are a superhero of course and we all know they don't exist!] we need to sleep. As the earth rotates, the markets in different time zones shut for the night while others are open – ready for business. There are periods when time zones overlap, and at these times, there are more market participants buying and selling currencies. The two most important overlap times are the Asian/London overlap which occurs between 24:00 GMT and 01:00GMT, and the London/New York overlap which occurs between 13:00 and 16:00 GMT. When Daylight Savings Time is on, one hour is removed from each time to account for the time difference at this time.
During these overlap periods, there is an increased burst of trading activity, and this could lead to a breakout in either direction – a sell or buy signal.
There are two indicators used for this breakout strategy. The first is the ant-GUBreakout_V.0.4.1 indicator, which highlights the highest and lowest price boundaries during the three hour time period in view, and the i-ParamonWorkTime indicator, which gives a colour demarcation to the overlap of the time zones. The two indicators are seen in action on this chart:
The ant-GUBreakout_V.0.4.1 indicator is optimized to pick the highest and lowest points within the three-hour overlap of the London-New York session (marked in red). The trader can therefore use the horizontal trend line tool to mark the high and low points within the Asian-London overlap period (marked in blue).
Implementing The Strategy
This strategy can only be analyzed using the MetaTrader4/5 trading platform. So even if you are using another trading platform, download the MT4 and open a demo account on which you can implement this strategy, then transfer the results to your trading platform.
Download the 2 indicators here. Unzip the file, and place the two indicators into the Experts -=> Indicators folder of the MT4 platform. Use the GBPUSD, EURUSD, EURJPY and GBPJPY as the currencies of choice. For the London-New York overlap, other USD pairs will work as well.
Open a 15 minute chart and draw two horizontal trend lines where the candlesticks make a high and low respectively, in the blue region (Asia-London overlap zone). Apply the i-ParamonWorkTime indicator to the chart, taking care to change the GMT shift to the number of hours by which the time on your charts differs from the Greenwich Mean Time. You can check this by moving your cursor to a candlestick and seeing the displayed time.
Once this has all been setup, open the following pending orders:
1) A Buy Stop a few pips above the candle high trend line in the blue area, or above the trend line marked by the ant-GUBreakout indicator in the red region.
2) A Sell Stop a few pips below the candle low trend line in the blue area, or above the trend line marked by the ant-GUBreakout indicator in the red area.
Alternatively, you can watch the price action and wait for a candle to either close above the candle high trend line, or below the candle low trend line in the two regions. This signifies a breakout, and the trader can then enter a market order in the direction of the breakout and target 25 to 40 pips.
In this example seen above, the price broke out of the candle low marked by the ant-GUBreakout indicator and was able to make about 25 pips before the price reversed. The reversal point of the trade corresponded to an area where the market had recently made a minor, short term support. Therefore, traders could use the nearest support/resistance levels as guides for trade exits.