Introduction
I used to trade early morning breakouts quite a lot in the past, and to be honest, I have forgot just how profitable they can be.
The downside is that you need to be at your computer early in the morning between about 6 AM and 8AM (UK time), which is why I haven’t really had the opportunity to trade these breakouts recently, but if you are available at this time, you can get some strong and predictable price moves.
As you may have discovered yourself, the GBP/USD is a very difficult pair to trade right now because it is so sensitive to any Brexit announcements, and seems to be waiting for any many major developments before moving strongly in either direction.
That’s why short-term day trading may be the best way to trade this pair right now, and early morning breakouts are ideal because an average trade may only last about an hour or two at the most, and they obviously occur early in the day when there is unlikely to be any market-moving news other than the occasional economic data release.
How To Trade These Breakouts
The key to success with this type of strategy is to wait until you have a very small overnight trading range between 12 AM and 6AM on one or more of the major forex pairs, and then trade the subsequent breakout on a short-term chart (I like to use the 5-minute chart).
It is imperative that you have a tight overnight trading range in comparison to the average trading range because then there is the potential for the price to move a lot more when it does break out of this range. Therefore you may not necessarily get a decent set-up every day.
Once the price breaks out, which could be before or after the London market opens, you can enter a long or a short position when the 5-minute candle closes, and either scale out of the trade in stages, moving your stop loss to break-even as soon as possible to effectively ensure a free trade, or set yourself a price target based on the chart.
I have found that pivot points act as excellent price targets because the price will often be driven upwards or downwards to hit these key points on the charts.
GBP/USD Breakout From Earlier Today
To show you how effective this breakout strategy can be, you only need to look at how the GBP/USD traded earlier today.
In this instance the price traded within a really tight trading range of just 15.8 points between 12 AM and 6 AM, compared to the average daily trading range of 101.8 points, and so when the price broke strongly downwards out of this range and closed at around 1.2800 on the 5-minute breakout candle, this would have been a good place to enter a short position.
As you can see, the price went straight down to the S1 pivot point level, which would have been a good place to exit your position or close half and move your stop to break-even, and the price actually continued to fall, falling just short of the S2 level.
All this happened before the London market opened, so the point is that you can find some profitable early morning breakout trades if you are available to trade at this time.
Of course not all of these breakouts will be profitable, but if you wait for the very best set-ups with very narrow overnight trading ranges, you should hopefully have more winning trades than losing ones.