Free Guide to the London Opening Range Breakout in European Forex Markets

The Daily Forex Opening Range Breakout Strategy

You're probably asking, "Isn't the Forex market supposed to be open 24 hours a day?" Yes, that's what the books and marketing material love to say, and for all intents and purposes, it's mostly true. But we first need to review why this is the case.

While there is no centralized exchange for trading in the Forex market, there is a global network of major banks who have extended credit to each other in order to trade in this glorious interbank market we spend so much of our time with. These banks, and the humans that trade for them, still need to sleep. Granted, there are situations where an overnight shift is asigned to trade on the darker side of their local time zones, but the majority of the trading volume from each financial institution participating in the Forex market is still centered around the bank's traditional hours of operation.

The traditional trading hours of the world's major banks are 8:00 (8 AM) to 17:00 (5 PM) in their respective local time zones.

Now consider the fact that the major banks whose transactions impact the Forex market the most on the daily basis are, on order of volume: London (UK), New York (US), Frankfurt (Germany), Tokyo (Japan), and Sydney (Australia). The first two (London and New York) tend to account for more than half of the day's trading range, and much more than half of the daily trading volume in the Forex markets.

For the purposes of charting, most MetaTrader brokers tend to use Central European Time (CET, the same time zone as Frankfurt, Germany) due to the fact that its midnight corresponds to the open of the day for Sydney, Australia's financial institutions. As a result, daily time frame's candle stick and bar charts tend to look cleaner on Sundays.

If you're interested in this, you can look up the current time for each of these regions to keep track of each local 8:00 AM. If you watch this every day, you will notice the spikes (some bigger than others) of volatility created by the sudden burst of trading volume as the banks enter the market for the day. For the purposes of this strategy, we'll focus on the London open, which should occur at 9:00 CET on most MetaTrader platforms (depending on your broker's settings).

Here's the basic method:

Also take note of the fact that Frankfurt banks opened at 8 AM CET, one hour ahead of London, creating the first (but smaller) spike of volatility, marked X above. This spike rarely follows through between 8 AM to 9 AM CET (Frankfurt time), and the real trending moves tend to come in when London's financial behemoths join the party the following hour.

To optimize this strategy for a favourable reward-to-risk ratio (ie. losing trades lose less than your winning trades make for you), place your initial stop loss order around the mid-point, or at most 75% of the range size away from the entry, to avoid constantly entering into 1:1 trades. Your bottom line will thank you, despite a few frustrating days in which your stop might get hit before the market continues into your intended direction. This is part of the plan and should be accepted calmly, knowing that it was a planned exit to avoid oversized losses. To scale out of this position, your first target should be about 1.2x the size of your stop loss (difference between your stop loss and your entry price). Some traders prefer to trail the stop afterward, while others prefer to take full profits before the New York banks open. (The hour after the New York banks open is marked C, this is significant because this is the hour that the American stock markets open, which are heavily correlated with all US Dollar Forex pairs.)

Note that this strategy is traditionally traded with the GBP/USD (British Pound vs US Dollar) currency pair, but should be equally as effective in other pairs and crosses involving the British Pound or Euro, including the GBP/JPY (the beast, tread with caution... or smaller position sizes to start).

Due to the fact that 8 AM in New York's Eastern Time will always occur in the afternoon of London's time zone (give or take an hour a few times a year, since London switches to and from British Summer Time a few weeks before New York switches to and from its Daylight Savings Time), the peak volume of the day always occurs in the New York morning (London afternoon) as the world's two largest financial centers participate simultaneously in the most volatile and liquid market in the world. Some traders also apply the opening range breakout to the New York 8 AM breakout using the range created by the consolidation during London's lunch hour. When London's bank traders return from Lunch, they combine with the New York banks's opening so another opportunity exists at this time frame.

To further optimize this strategy, you can switch your chart to a lower time frame (such as 15-minute candles or bars) after entering your opening range breakout trade. You can then apply the principles covered in our introduction to trend trading in Forex page to scale out of your position at the possible turning points.