One of the unique qualities that sets forex trading apart from trading other forms of financial instruments, may it be stocks, indices, commodities, CFDs, options, etc., is that it is open 24 hours a day, 5 days a week, plus some.
This brings a whole lot of opportunities and some challenges.
Unlike the stock market or other markets that have a start of day and end of day, gauging market sentiment across markets is not as straight forward when it comes to forex trading. For example, the Tokyo market may be bullish on the yen bringing the USD/JPY pair down during the Tokyo session. But this doesn’t mean the US market would follow suit. It may be that they would be even more bullish on the USD and bearish on the JPY. Then, as soon as the US session opens, the market may reverse.
This doesn’t only apply to the USD/JPY. It is also true as with any currency, may it be EUR/USD, GBP/USD, EUR/JPY, etc.
Different markets having different trading sessions and different active times cause gauging the big picture sentiment of a forex pair a little bit harder.
However, this differences in market sessions and characteristics of different markets also bring with it some opportunity.
Today we will be learning about the opportunity that usually occurs as London market opens.
First, let’s discuss the characteristics of the market prior to the London open, the Tokyo session. The Tokyo market is known to be the third biggest market in the world of finance, which heavily influences the forex market. It is also the first big market to open, due to its location and time zone. However, even though it is considered a big market, it is still relatively quiet compared to the London and US sessions. Volatility is relatively low, and the market doesn’t seem to make big swings.
Crossing over to the London session, the next big market that opens as the Tokyo session closes, things change a whole lot. The London session is the biggest financial market in the world when it comes to forex. They are so big that the market movements in the Tokyo session is often dwarfed by the movements during the London session. And London traders don’t seem to be timid. When the London market moves, it moves big time.
This crossover from the calm and serene market environment during the Tokyo session towards the massive infusion of volatility during the London open is our opportunity. This is because the Tokyo session and usually even the quiet hours leading towards the open of the Tokyo session often resembles a market contraction. Sometimes, it even looks like a narrow range. As with most ranges and contractions, a breakout out of these ranges or contractions often mean a directional move. The London market often provides this directional breakout from the range formed by the Tokyo session.
The Setup: How to Trade the Tokyo Range London Breakout
Now that we have a better understanding of the characteristics of these two markets, let’s discuss how to trade this.
This strategy is to be traded using only GBP pairs. Out of all the GBP pairs, I find the GBP/USD pair to have more advantages that the others. First, the US market is one of the biggest forex markets. Yes, the Tokyo market is also big, but take note that they have already opened prior to the London session. Any fundamental news or rumors that would affect the Yen would have been released by now. This often causes a wider range or taller box for the GBP/JPY pair. Other pairs could also work but what we are looking for is a big market, something that many traders would be trading as the London market opens. This influx of traders trading a pair would be our source of volatility and momentum.
You could use different timeframes below the hourly chart to see all the nuances that happened during the range and the price action as our orders are hit a little bit better. However, this might cause us to feel fear as we see price action not moving in our favor in the lower timeframes. I’d rather set things at the hourly chart and forget it.
Identify the candles within the Tokyo session from its market open up to the candle prior to the London open.
Mark the highest and lowest price within the Tokyo session forming a range or a box.
Right before the London session opens, place a Buy Stop order at the high of the box and a Sell Stop order at the low of the box.
Stop Loss: Place the stop loss for both orders at the middle of the box.
Exit: Set the Take Profit target price at 50 pips from the stop entry orders.
Note: Cancel the remaining pending stop entry order as soon as one is hit.
This strategy is something that a beginner trader could start with. It is simple and mechanical, something that you could do almost every day.
However, this strategy is not perfect. It doesn’t work all year every day. You will get some losses at times. Remember, what we are looking for is a breakout from a range or a previous high or low. Ranges, previous highs and lows are resistances. As with all resistances, price could bounce off it. What we are hoping for here is that the momentum brought about by the influx of London traders would cause price to breakthrough.
Another thing to look out for is a volatile Tokyo session. This often causes the range to be relatively taller, which makes the Tokyo session an expansion instead of a contraction. What we are trading are breakouts from contractions. Expansions often mean that room for price movements are often exhausted. Some traders who do variations of London breakouts use Average Daily Range (ADR) to gauge if price is exhausted. I’m not a fan of this. Remember that the forex market is 24 hours a day. There is no start of day making the ADRs skewed. An ADR with one broker will vary from the ADR of another broker.
One last word of warning, GBP is a very volatile currency. It could reverse on you with long candles very quick. I have a trader friend of mine who saw his account growing with this strategy in a span of two months only to find all his profits wiped out in a single trade all because he didn’t place a stop loss.
How to install Tokyo Box Breakout Forex Trading Strategy?
Download Tokyo Box Breakout Forex Trading Strategy.zip
Copy mq4 and ex4 files to your Metatrader Directory / experts / indicators /
Copy tpl file (Template) to your Metatrader Directory / templates /
Start or restart your Metatrader Client
Select Chart and Timeframe where you want to test your forex system
Right click on your trading chart and hover on “Template”
Move right to select Tokyo Box Breakout Forex Trading Strategy
You will see Tokyo Box Breakout Forex Trading Strategy is available on your Chart