Monday, February 13, 2012

London Breakout Strategy

I spent yesterday and this morning backtesting variants of the "London Breakout" strategy. I tested the first half of 2010 and the end of 2011 and yielded negative results.

The premise of the strategy is quite simple. You mark the highs and lows of the overnight Asian session, and trade the break of these highs and lows once London opens. The reasoning is that most major market movements will occur during the London session, and the break of the Asian high or low will point the direction of such movements.

So why did my backtest provide poor results? I don't think this is a true "breakout" strategy. It's a given that the Asian high or low will break, even when London decides to horizontally range. I feel that such breaks aren't widely respected by the market, which is what you need to generate momentum behind a breakout.

Rather than solely rely on the break of the Asian range, I may configure my backtest to include candle patterns just prior to the London session e.g. two consecutive bearish candles may signal a bearish breakout on London's open.

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