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Thursday, September 6, 2012

How to trade London session

Those that trade currencies are familiar with the concept of London open, European, American or Asian sessions. All traders, whether trend, swing or day search for volatility and bigger than usual moves. We need some direction in securities in order to make money. That’s what trading London session is all about. When London opens biggest amounts of money starts entering the market (Forex) and this creates what all traders want: volatility and moves. 

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After reading the article read my other related posts and watch a video on news trading:

Trading BOA interest rate decision
Inverted head and shoulders pattern
Volatile trend trading strategy
Fortunes are made when trends change
How to make money in trading breakouts

Volatility increases at London open

If you look at the chart of eur/usd pair below you will see clear examples of what I mean. The period covers the days from the 21st of August till the 5th of September this year (2012). It is just an example of four days. The levels of price advances are marked in ellipses. Scroll back and study the pair for yourself to see that volatility does increase during London session and it is one of the best times to trade currencies (if you are a day trader). And this is true not only about eur/usd and other majors, but also about crosses. 

Now, there are a few ways how one can trade London session and a lot of traders like doing that. Not everybody is successful due to many reasons, one being the wrong type of system. Let us look at how one should not trade and also how one should trade these volatile sessions. 

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Asian range breakout method

One of the prevailing tendencies is to trade Asian session breakout on the London open. A trader who uses this kind of strategy would draw trend lines marking the high and the low points of the range. The high point (of a currency pair) would be the highest point that the price reached during the Asian session and the low point would be the lowest point that the price reached during the Asian session. He then places a buy stop order above the resistance trend line and a sell order below the support trend line. If price goes up buy order is opened and sell order removed (by a trader). If the price goes down sell order is opened and buy order is removed (by a trader).The chart of eur/gbp below illustrates that. You can do the same kind of thing with any pair yourself daily. 

 Problems with this kind of method

One major problem with this trading system is that you do not follow the news that is usually released at European session and these pieces of news create significant moves. So, you might have a lot of false breakouts as a consequence and the price will go in the other direction when news is released. Well, sometimes it can go in your direction, but quite often not (will not go into detail about this). 

Another problem is that this method does not take into account a prevailing trend or swing a given currency is in at the time. So, if you trade Asian ranges breakouts against the prevailing trend you will often get burned and have a loss. If you trade the breakout in the direction of the move you have better trades (in terms of percentage). However, it is still not the best way to trade London session. 

How can one trade London session better?

First, of all if you looked again at eur/usd chart you will see that the entire price moves that are marked in ellipses were upwards. What does that say to us? If you look at 4 hour chart you will see that the pair all of the time was in an upward swing. What does that mean?

It means that we have to trade in the direction of the trend or a swing. Contrary to London open breakout trading strategy (Asian session breakout trading strategy) you don’t trade blindly. You trade in the same direction the market goes. It means, in this case you only buying. 

If you also studied fundamental news calendar you will see that there was no major news scheduled during those periods of times where price is marked in ellipses. It is good for us. It means no major news will impact our trading decisions and we will be able to trade without thinking about some crazy events that could cause markets to go against us, hit our stops and then go back again in the direction that we have predicted. It can be very disappointing, so if you are not experienced it is better to stay out of the market when these news events are released.

You will see a lot of situations when major news (such as interest rates, NFP, GDP) are released you have a lot of opportunities to make some nice technical trades in the direction of a prevailing move. Always remember. Enter your trades in the direction of that prevailing tendency. 

How do you enter the market and where you place a stop and where to exit?

If London session is such a good time for entering market it is of vital importance for us to figure out the place of entry. Firstly, if the range is very small it is simply advisable to miss a trade and wait for the pair to visit most recent support. You do have corrections in swings, so it is best to wait for those to enter your trades. It would also mean that you would miss some days and not trade at all. At least, this is how I do it. 

Now, there are two ways how to actually enter trades during these sessions. The choice of which one to use depends on where the price is at a given time when London session starts. For those who are impatient I can say that you can use both methods. I prefer using only the second one. 

The first method – breakout trade

The first method is used when the price is at the top of the Asian range. You then buy a breakout. You need to place a resistance line above the highest point of the most recent session and buy when the price goes beyond the level. You place your stop below the lowest retracement (small valley) and you start moving it placing below 15 minute retracement candles (valleys) till your stop(s) are hit. (See the image below)

The second method – buy at support 

The second method (more safer) is used when the price is at the bottom of the Asian range. You enter the market when 123 pattern or some other bullish formation is broken upwards. You move your stop(s) placing them below 15 minute retracement candles (valleys) till your stop(s) are hit. (See the image below)

The second method does not give you too many opportunities during the week, but it profit/loss ratio is much better and you will have many more profitable than losing trades trading this way. 

Ok, I hope you see now how you can trade London sessions. If something is not clear write me and ask. I will be more than glad to answer. 

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Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.