pL

aN
eT
nE
wB
iE
DI

GI

The London Open Breakout (LOB hereafter) is the third type of trading methodology I actively trade
other than pattern breakouts and swing trading. It's quite different in its nature and that's why I have
decided to lay it out in its own specific chapter.

TA
L

Do you see what I am getting down to? At that precise time, London-based institutional players (the
big dogs ruling the show) sit on their respective desks and their orders begin to roll in. We have
already established that London session is usually the one to dictate the overall market sentiment for
the rest of the day, either bullish or bearish. Well, in some occasions that overall market sentiment is
hinted at the London open, and that's what the LOB strategy is all about: exploiting an early breakout
in order to ride the overall market sentiment for the rest of the trading session.

Like I said, I trade a conservative variation of the LOB and therefore my pre-entry requirements are
pretty tight. I know of one colleague trader who exclusively trades this strategy and he trades it in the
direction of the trend, counter-trend, upside down, inside out, and every possible combination of them
:p
I personally haven't been able to master the LOB to those levels and thus I require some conditions to
be met before searching for an entry.

Explaining what the LOB is based on is pretty simple because it's one of those few things in life that
makes sense from the very beginning. Here's the deal: Tokyo session is the least active of all three
main markets (London , New York and Tokyo). It's by far the one with the narrowest trading range.
London , in the other hand, is the wildest of them all and the one usually putting in the main thrust for
the day. Alright, so far so good. But here is the trick: they overlap for a brief moment; just as Tokyo is
getting ready to close the shop for the day, London is opening up. So what happens when the quietest
market gives way to the most active one? An enormous influx of volume throughout those two hours
time lap!

AR

Please be aware that this is an advanced technique, rather difficult to tame and prone to give fake
signals, but it's also one that some few traders have mastered, making of it their only and sole trading
strategy. I myself trade a conservative variation of it, which is the one I am about to explain to you
guys.

pL
aN

eT

nE
wB
iE

Which currency pairs?

DI

GI

The LOB is a momentum strategy so, like in any other type of breakout, it's best suited for currency
pairs with a high ADR. Moreover, since it's a trade spurred by Europe-based traders, stick to currency
pairs involving either the EUR, the GBP or the CHF.

TA
L
AR

Time schedules
No other way around it if you want to trade the LOB you gotta be in front of your trading desk at 8
AM Euro time, even a little bit earlier to analyze the setups in peace.

The setup chart

The setup chart is the hourly chart and there's no need to scroll back in time for more than few days.
Basically, we will focus our attention of what's been happening throughout the present week. The
LOB strategy is not a trend-trading methodology from a general point of view, but like any other type
of breakout it's more reliable if the breakout takes place in the direction of the move preceding the
consolidation area we are breaking out from.
Since I trade a conservative variation, I do indeed require that the hourly chart is showing a moreless
one-directional outlook throughout the week. I don't mean a 3 SMA-type stainless-steel trend, but
non-the-less a clear bias for the last two or three days. Of course, we will void any setup that shows
conflicting signals on the 4H or Daily chart just as usual, but like I say I am not as strict in my trendfiltering conditions when trading the LOB. All I need is a rather defined price action directional bias
during the last few days, that's all.

The range
Like in any other type of breakout, we need a range to breakout from don't we? The range in this case
is going to be the Tokyo session in itself. That's right, we will bracket whatever's been happening in
the chart during the Tokyo session, which spans from midnight to 8 AM Euro time. That will be the
range to look out for a breakout.

By far, the best pairs are the GBP-crosses such as GBPUSD, GBPJPY, GBPAUD, GBPCAD,
GBPNZD, and GBPCHF (all of them with over 120 pips/day on average). In second place come the
EUR-crosses, especially EURJPY, EURNZD, EURCAD and EURAUD (all of them with over 100
pips/day on average). I personally avoid EURUSD, EURCHF and EURGBP because they just don't
have the punch. Finally, USDCHF may also be suitable for the L.O.B. strategy.

pL
aN

eT

However, there is one more requirement here guys: Tokyo session's range must be tight and
sideways. The tighter and more horizontal the better, so when the London momentum kicks in, the
more violent the breakout will be. Also, it's always a plus if the range is well defined with a few bars'
highs and lows confining the range boundaries.

nE

wB

iE

DI
GI

TA

L
AR

The breakout

T
The breakout should take place within the first couple of hours from London open. Remember that
we are looking into a momentum explosion guys, and therefore if the breakout doesn't boom up rather
early we might be looking into a quiet day throughout London, and that's not what we're looking to
trade with this technique.

And just so you have a graphical idea of what I'm talking about here, let me show you a basic drawing:

pL
aN
eT
nE
wB
iE
DI

GI

You guys are already familiar with the entry routine: breakout thrust, followed by a pullback to
breakout levels (moreless) and finally a continuation swing scoring new highs. As we take out the
tip of the breakout thrust our entry will be triggered, being the stop loss placed behind the tip of the
pullback aspect. You have already read about breakout entries in previous chapters.

TA
L
AR
T

Don't be surprised if sometimes you don't get the 3 aspects of the breakout, but rather price simply
takes off in one direction upon breakout and never gives us the pullback we require for an entry. At the
end of the day, this is a momentum-type breakout so price can easily rocket off in one direction and
never look back. In those cases, I don't try to hop onboard at all - I just wave goodbye and let the train
go.
One last word of warning regarding LOB entry: the 3 aspects breakout formation might not be as
squeaky clean as other type of breakouts. Remember that they occur in momentum and rather
quickly, so the pullback aspect might not quite stop to the pip right at the breakout level. Many times
the pullback dives into the Asian range again before resuming the swing in the desired direction, so
don't be too strict on the B-P-C formation. Like I said, the LOB is an advanced technique and it will
indeed take you time to master it. I recommend you to pass on any breakout you don't feel comfortable
with. Over time you will get the grip of it, but it's best if you stick at the beginning to the best looking
set ups for the time being.

The target I use for the LOB is the ADR blended with Round Numbers as explained over chapter #4.
The whole LOB concept assumes that such initial breakout as the market opens will point out the
overall market sentiment for the day, or at least during the London session, so it makes sense to use a
conservative ADR as the target.
However, there are three elements we must keep in mind as far as exiting a L.O.B. trade because they
might spoil the trade altoghether:

pL
aN

eT

1) We should be sensible with your targets so if there's another level of support/resistance in the
neighborhood such as a round number, a trendline, a previous swing high/low, etc, we may want to cut
short our targets a bit so that that level doesn't mess things up.

nE

wB

iE

DI

2) Another element to keep track of in the New York session open at around 2 pm Euro time or 8 AM
EST. It's not unusual to see a deep retrace during the first hours of NY and you might not want to
endure such retrace against your position, so if by the time NY opens up you are satisfied with your
profits, don't hesitate to close out and call it an early day; there's nothing wrong with pocketing your
profits guys. Most of the time, the target should be reached within the London session, but just in case
it's not the case be ready to close out as NY opens. No need to risk giving all those pips back to the
market.

GI

TA

Alright, now that you have studied the theory behind the LOB technique, it's time to soak our feet with
some videos so everything sinks in. Firstly, let me show you a real case study where I will debrief you
with all the elements encompassing a typical LOB setup.

Ch7.sec4.video02.swf

Ch7.sec4.video01.swf

AR

3) Also around NY open time there might be a major news announcement coming out from either US
or Canada which might affect our position. These news items usually hit the wires between 1:30 pm
and 3:00 pm Euro time (7:30 am to 9:00 am EST time), but make sure to check the Forex Factory
economic calendar every morning and take a mental note of the news bullets for the day. I personally
dislike trading through important news because they can easily slap the chart against you within
seconds, so my recommendation is to either move your stoploss to breakeven before the news, or even
better close the trade and bank your pips, especially if the trade has run already most of its course to
the final price target. Why would you risk your hard-earned pips to the news-lottery? Here below you
can watch a fine example of what I am talking about...

pL
aN

eT

And now let's watch two videos of two live trades I took based on this trading methodology:

nE
wB
iE
DI
GI
TA
L
AR
T

Ch7.sec4.video03.flv

Ch7.sec4.video04.swf

Watch the video below: it's a LOB type of trade that was looking fantastic but when it was about to
give us a signal at the aspect #3 of the breakout, price began to meander sideways and all momentum
was lost.

Ch7.sec4.video05_FailedLob.swf

pL
aN

eT

Let's now watch another live video showing the importance of being patient and disciplined when it
comes to enter a London Open Breakout type of trade. It was a valid setup, but the "continuation
aspect" of the breakout+pullback+continuation routine never quite happened. Instead, price dived
down to the other direction voiding the setup altogether.

nE

wB

iE

DI
GI
TA
L
AR
T

Ch7.sec4.video06.flv

Watch below an example of a beautiful LOB setup that sort of lost momentum half-way through and
eventually wiped my pips off the table. As soon as I saw price stalling around London noon, I perhaps
should have closed out at +20'ish pips and call it a day. Oh well

Ch7.sec4.video07_GBPUSD21may.swf

pL
aN
eT
nE
wB
iE
DI
GI
TA
L
AR
T
Finally, I'd like to remind you guys to remain flexible as far as the actual overnight range goes
because that range sometimes doesn't quite shapes up as an actual range but rather as a triangle or a
perhaps a flag. What's important is not the shape of the consolidation area but rather the fact that, after
a clearly biased market for the week, price has been consolidating and gathering momentum
overnight and as soon as London opens its door, price breaks out from that consolidation area in
momentum and in the direction of the overall market sentiment.
In order to illustrate this point, I have uploaded a video from my live trading archives in which I traded
a London Open Breakout type of trade showing a triangular overnight formation as opposed to a range
formation.

pL

aN

eT

nE

wB

iE

DI

GI

TA

AR

Ch7.sec4.video08.flv