A Review of the London Opening Range Breakout

Review of the London Forex Opening Range Breakout

The opening range breakout strategy based on the major London banks' daily Forex trading activity performed particularly well in the months following the 2008 financial crisis. Overall, however, it has been a profitable trading strategy based on historical data from 2004 till the end of 2010, as well as actual live trading (or "forward testing" as it's sometimes called among trading communities) over the past two years. Like any strategy, however, your expectations from it must be realistic.

First of all, the British Pound is not a penny stock. Even if it may happen on the odd occasion that a major announcement involving the UK, the European Union, or the United States, might cause a wildly trending period in this currency pair, this strategy relies on trading once a day (or at most twice a day if you use it on the New York open as well.) Since it's unlikely for the catalyst of a major economic event to happen every day (even if its effects may last, the surprise -- and therefore the opportunity to get in at the initial turn of a long-term trend, would be over.) For this reason, you simply cannot expect the currency pair to move in one direction virtually indefinitely as a stock might (either from a major positive development driving the stock 400% or more to the long side, or a crash to near-zero from bankruptcy.) Even the 2008 financial crisis only caused volatility to scale up (moves were bigger and more pronounced, and bigger was an understatement, but there were still Fibonacci retracements on a regular basis.)

Advantages of the Opening Range Breakout Strategy

Timing Predictability: One of the most convenient factors to consider is that the Opening Range Breakout tends to work well for Forex traders who prefer to know, predictably on a daily basis, at what time to look for trades. If you live in the UK, you won't have to be awake all night checking in on the Tokyo and Sydney sessions. If you live in the New York time zone, and are a natural night hawk, you might even enjoy staying up all night to trade the London morning.

Volatility is Inevitable: While the strategy is not perfect (no strategy in the world is), its advantage is that it relies heavily on a phenomenon that is almost guaranteed to occur every day, except for UK bank holidays or other anomalies. For the most part, currency pairs in the Forex market simply do not stay still for long. So even if you might get stopped out a few times, a good opportunity for a big trade (especially if you trail your stops on at least part of your positions), is always around the corner.

Automation Potential: This is one of those strategies that a beginner to programming would likely be able to try to code this strategy as a first-time project. Its parameters are simple enough that if you thought of your own flavour of the Opening Range Breakout strategy, it's fairly likely that a basic understanding of a language like MQL (MetaQuotes' programming language for their MetaTrader platform's "Expert Advisor" robots) is enough to make a working robot to trade this for you on a daily basis. Be careful, however, as an automated version of this strategy can sometimes perform differently from your expectations if there is even a minor mistake in your code. At the very least, keep an eye on the robot and intervene manually when necessary if it does something you didn't expect or intend it to do.

Disadvantages of the Opening Range Breakout

Opportunity Cost: This only applies to day traders. For many day traders, trading 25 to 100 times a day is not unusual, and the main advantage of that is as long as your reward-to-risk ratio is maintained with discipline, and you are constantly exploiting a real edge, then the higher frequency of trading (assuming you are trading with a very cost effective ECN broker), will only yield a better return for your positive edge. While the Opening Range Breakout tends to yield a positive expectancy over time, it can only really be traded once, or at most twice (including the New York open), daily. The Sydney, Tokyo, and Frankfurt opens rarely present the same opportunities with as much follow-through in the newly created trend. For position traders, however, this would not be an issue since the expectations of returns, account size, and scale of time should already be adjusted to an expectation of less frequent transactions.

Periods of Drawdown: Everyone who has consistently traded this method for more than a year can attest to this. While the overall profitability of the opening range breakout is undeniable, there will be periods that can last up to months in which the strategy will be frustratingly close to breakeven for your account, or worse, a bit of a drawdown. As long as you keep a good reward-to-risk ratio, this should be fine, but don't change the strategy every time you're on a losing streak. It's tempting, but the more you do this, especially if you start doubting yourself and resorting to lower reward-to-risk ratio trades to increase the odds of winning trades, the less likely you are to return to profitability because your losses will have eaten up most of your recent gains and possibly more. Staying disciplined can be difficult in the face of a down period for such an infrequently-traded strategy, so be careful not to lose your discipline and confidence in your plan.

We may add to this review based on additional contributions from our staff, or comments from our readers. If you stumbled onto this page but are not familiar with the strategy, be sure to check out our London Opening Range Breakout Forex strategy page to get you started.