We’re going to use the range definition that takes into consideration only the body of the candles, excluding the wicks.
Note* this trading rule can be adapted as you get more experienced at reading the price action.
Who knows, maybe you’ll be able to discover some price action tendencies around the London open that no-ones was able to see.
In the GBP/USD chart we’ve outlined the trading range:
The London open breakout strategy works because the Asia trading range tends to attract buy and sell stops above and below the trading range.
The bulk of buying and selling stops becomes an easy target for smart money.
Remember that traders need liquidity to execute their orders.
And, the smart money is always in search of liquidity to fill their large orders. That’s the reason why smart money needs to trigger those stops.
Rule #2: The One-Hour before the London Open Needs to Generate the Breakout
Our backtesting results revealed that momentum really starts to pick up 1-hour earlier than the
actual London opening session.
There are some smart ways to trade this burst of momentum.
Let’s see some technical ways to trade the pre-London open.
We don’t need to guess in which way the market will break, we let the market tip his hand and show us the way.
This is where things get interesting.
Let me explain…
During the London session, we’re going to see the most traded thus the foreign exchange market should really take off in one direction or another.
From our example, we can note the GBP/USD one-sided move.
We didn’t have any interruptions in the momentum activity, and that’s the KEY for this whole trading setup to work.
Let’s now outline the second technical element you want to see with the London setup.
Rule #3 Buy the London Open Breakout
Immediately after the London session opens, we want to see the price fading the pre-open move.
If the price move starts fading, we know it was a false breakout
The smart money has used the pre-open move to trigger the stops below the range and now they reverse the tie and start buying.
We want to see price pulling back into the range at the same speed as it went up.
In simple words, the momentum used to produce the false breakout needs to be equal to the momentum used to fade the pre-open move.
We enter our trade after the first 5-minutes have confirmed that the price is reversing.
Once this trade setup is completed, you should see a price formation that takes the V-shaped form (or inverse V-shape).
Let’s now explore what methods you can use to cash in the profits.
Rule #4 Take Profit or Ride the Trend
We can measure the size of the Asia trading range and project that, from the top or bottom of our range to get our profit target.
But, oftentimes this type of setup can lead to a trading day that can extend in the days to come.
Now, in this case, it’s wise if you employ other trading tactics so you can actually profit from this trend.
In this example, the better take profit strategy would be to use a trailing stop.
You need to be ready to explore other trading methods to manage your trades.
Protecting the downside is as important as making money.
Rule #5 Use a Time Stop Instead of a Price Stop
In order to fade the London breakout, you need to use unconventional trading methods.
In this regard, for our stop loss trading strategy we’re going to use a time stop instead of a price stop.
The first time I’ve ever heard about the time stop concept was while reading the Market Wizards book.
Billionaire Hedge Fund manager Paul Tudor Jones one of the greatest traders of our times said:
“When I trade, I don’t just use a price stop, I also use a time stop.”
If you want to get a glimpse into the mindset of the most successful traders and hedge fund managers, please read: Top Trading Quotes of All Time - Learn to Trade.
So, do you want to know how to apply the time stop to the London strategy?
It’s very simple…
If in the first hour after the London open the price didn’t COMPLETELY reverse the pre-opening breakout, we exit the trade.
It’s simple as that, no further explanation is needed.