London Opening Range Breakout Strategy

The London Opening Range Breakout is a strategy that is simple to understand and apply. It also has the appeal that it requires relatively little time to trade it, generating at most one trade per day.

Origins

Richard Dennis, famous for his Turtles Experiment, is an example of a successful trader who worked with breakouts. In his most well known trend following strategy he bought on a 20 day high and sold on a 20 day low.

Toby Crabel popularized the Opening Range Breakout strategy. Crabel is a highly successful American commodities trader and fund manager. He outlined some of his ideas in his book Day Trading With Short Term Price Patterns and Opening Range Breakout.

The concept behind the opening range breakout strategy is that there is a better than even chance of a trend day taking place after the market has traded within a narrow range for a set period.

Why Trade the London Open?

The London Open (8AM GMT time) makes a great time to trade for several reasons.

The London trading session is the most liquid, accounting for 30% of all forex transactions.
The London session is typically the most volatile sessions.
Trends often form at the beginning for the London session that carry through until the beginning of the New York session.

Strategy Rules

Currency Pair: GBP/USD (You could also experiment with other pairs such as GBP/JPY and EUR/GBP)

Use the hourly chart and use the candlesticks in the prior 5-7 hourly bars to create the range. Some days the market will trade sideways during the Asian session, creating a range with a well defined high and low. These are the best days. Other days the market trends one way or the other during the hours leading up to the London open and on these days there is no narrow range to break out from. Normally however, the Asian session is not very volatile.

Long Entry: Place a buy stop 2 pips above the high of the range created during the Asian session.

Short Entry: Place a sell stop 2 pips below the low of the range created during the Asian session.

Filters (optional): Only buy when price is trading above the 50 period simple moving average on the daily chart. Only sell when price is trading below the 50 period simple moving average on the daily chart. This filter can enhance your probability of success by trading more in the direction of the trend on the daily chart, but will mean that you get fewer trades and may miss some good opportunities.

Profit Target

The Average True Range (ATR) indicator can help you get a reasonable expectation for a profit target, once you are in a trade. Set the ATR to 20 periods to determine the average range for that period. Set your profit target to this level. You may want to scale out of winning trades and make this the level for your final exit of the trade.

Conclusion

In trading this strategy I got the best results by paying attention to the quality of the range – ie how well defined were the breakout levels. This mattered more in my experience than looking at moving averages to try to trade in the direction of the overall trend. I also found it worthwhile to scale out of trades, rather than holding all till the final profit target. Remember of course that trading involves substantial risk of loss and is not suitable for every investor.