What if we enter the market when the price breaks the Asian session’s highest and lowest price levels? or in another word, what if we backtest the London breakout trading strategy 100 times using an indicator?
Do you think it’s a profitable strategy? should we trade the London session according to the price-performance during the Asian market? Well, let’s review this strategy and backtest it together to find out?
A few days back we received an interesting trading strategy from Alex Olson who’s one of our subscribers. It’s not very different from the London breakout trading strategy that we backtested last time and traded in live market conditions.
As usual, we will review the strategy and see some examples from the chart. Once done, we will begin backtesting the strategy with the help of a trading indicator that Alex has sent us. I will leave a link in the description box if you are interested in downloading it.
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With that being said, let’s get into it.
This strategy relies on the performance of the price during the Asian session. In simple terms, the London breakout strategy is a day trading method that seeks to take advantage of the trading range prior to the London opening session.
London breakout trading strategies are popular among traders these days as it allows them to trade forex or other financial securities according to the performance of the price during the Asian session.
The most basic form of establishing the Asian market range is to use the high and low of the previous trading session. This method takes into consideration the whole price action since the start of the new trading day.
The advantage that comes with this approach is that it will help you better manage your trade and you can have enough time to look at the fundamentals before entering the market.
Well let’s look at this example:
This is the EUR/USD 1 hour chart, we all know that each candle represents one hour. The Asian session runs for 9 hours, usually opens at 11 PM and closes at 8 AM (GMT). According to this strategy, we will only take into consideration the last 4 hours before the opening of the London session, this way we will have a narrower range.
So to define the London breakout range that we will be using on a given day, we need to draw support and resistance levels based on the last 4 hours before the London opening.
I am using a free indicator called Sessions by Junior Fx Addict. It helps highlight the different forex market sessions. I have disabled the New York market and kept the Asian one in red and the London session in green.
As we are working on a one-hour timeframe, that’s gonna be the last 4 candles, we should take into consideration the body of the candles as well as the wicks.
Let me use the rectangle tool to define the price range that we can rely on as part of the London breakout strategy we are testing today. We can consider the two lines as our support and resistance levels.
Once the market range is drawn, we will just monitor the price movement and wait for the price to break above or below it. To make life easier, we can set two price alerts. Most trading platforms allow you to do this, and since we are using tradingview, we can simply click on the clock icon and hit here to create a new price alert.
First, we need to select the pair we are trading, then choose “cross up or down” from the drop-down menu. For support select crossing down and type in the support price value. You can choose the alert actions. I always use mobile app notifications as it’s pretty practical. That’s it! just hit on OK and do the same thing for the resistance price value.
Perfect! Now, all we need to do is wait for the price to hit the upper or lower levels.
So what to do next, according to the strategy, once the price hits either the support or resistance, we should immediately go down to the 30 minutes time frame and wait for any candle that closes either above or below our price range. If a candle closes above the price range we immediately go long. On the other hand, we go short if the candle closes below the price range.
Let’s look at this example, we can see here that the price crossed below our range. As a second confirmation, we need to look for a candle that closes below the Asian market range which is our selling signal. We can see a strong downtrend that formed at this stage and it has a 100 pips potential, imagine if you ride this trend all the way down.
Before we begin backtesting, let’s look at a second example. This is the GBP/USD 30 minutes chart. we proceed to define our range, the last 4 hours before the London opening should be represented with 8 candles. We can extend the rectangle from the left side.
It’s clear that the price crossed above the price range and closed above it. This is going to be our entry signal. so we immediately go long.
That’s another successful trade.
Alright, it’s now time to backtest the strategy 100 times, today we will be using a free indicator that is designed according to this strategy. You can find a link to download it in the video description box. This indicator is called 3 Tier London Breakout and it’s developed by MER 7 1898.
Anyways, this indicator highlights in blue the last 4 hours before the London opening. And tells us the number of pips between the support and resistance levels, this value will be used to define the take profit and stop loss.
So basically, the take profit is positioned according to the width of our price range, let’s call that value “L”. These can be adjusted from the indicator settings but initially, we’ll have the first take profit at 3 “L” distance from our entry point. So we will always target the buy or sell target number 3.
Regarding the stop loss, we will just place it at a 2 L distance from our entry.
So to sum up, we are risking 2 L for a profit of 3 L. That’s a 2 to 3 risk to reward ratio.
Let me know in the comment section if you have any questions about this strategy. Alright let’s begin backtesting, we will use a $1000 balance and stick to 1 micro lot volume size.
While waiting for the results, don’t forget to hit the thumbs up button and subscribe to the channel if this is your first time here. You can also submit your trading strategy for backtesting, simply visit this link and provide the necessary details about your trading method.
This indicator might show you different values based on the settings as well as your server’s time management. Since we are using MT4, depending on the MT4 broker’s server time, the charts or the candlesticks on the charts are calculated differently. For example, most GMT brokers tend to have an additional candlestick such as Sunday candlesticks as well. While this might not be a big issue, when you are using a trading strategy that has time as a major factor, the result could differ from a broker to another.
We have just completed backtesting this strategy, let’s look at the results.
Well, the success rate is 68% and we have only got 32 losing trades, we managed to make 1812 pips in total. So to sum up, we have started this backtesting process with $1000 and ended up with $1181. That’s $181 total profit, it’s amazing right!