I ran a test over January on the morning breakout strategy that is very popular… especially with new traders it seems.
When I googled the search term ‘Morning Breakout Strategy’, there was very little in the way of results but plenty of people offering advice on how to trade this popular strategy.
So I decided to put it to the test.
What is the Morning Breakout Strategy?
The morning breakout strategy is a strategy using the GBP/USD when the London session opens. It is not dissimilar to the DAX breakout strategy.
The idea is that the price of the pair tends to break the trading levels/zones of the previous few hours and then trends that way throughout the day.
Sounds simple right? Well actually it is… and that appealed to me.
The theory behind the morning breakout strategy is that you take the highest and lowest price point of the previous 2-3 hours of trading and draw a line at these levels. You then place a set and forget order at the Spread Bet Company that opens a trade and goes long when the high is broken and goes short when the low is broken.
You are basically drawing support and resistance levels for the last few hours of trading.
As the data regarding the strategy online seemed a bit vague, I tested the strategy using 15 minute candles and the previous price levels from 6am until 7.45 am.
I then also ran a parallel test using 1 hour candles using the price levels from 6am until 9am.
Here is a graph illustrating what I was doing.
You can see that I have drawn a line at the highs and the low points on the 1-hour chart I did the same on and 15-minute chart.
The blue lines highlighted winning trades and the red lines losing trades or trades where I considered the stop loss was to big to open a trade.
My Rules Trading the Morning Breakout Strategy.
Once I had got my support and resistance levels in place, I’d set entry points 3 points above the highest high and 3 points below the lowest low of the previous few hours from 6 am.
So when I was testing the strategy using 15 minute candles, I was using the last 1 hour 45 minutes of price data [from 6am-7.45am] to draw my support and resistance levels.
When I was testing the strategy using the 1 hour candles I was using the previous 3 hours of price data to draw my levels. From 6am-9am.
Once this had been determined, I was looking to take 2 x my risk as profit. So 2/1. If I had a 30 point stop loss in place, I was trying to take profit of 60 points.
I also didn’t want my stop loss to be to big. Certainly no more than 60 points and the lower the better.
You then just need to log into your spread betting account and set up the trade. So you have 2 orders set to open. One long and the other short. You set your take profit level at double your risk [stop loss]
You also will need to cancel the other trade once either one has been triggered.
Results Trading the Morning Breakout
Here are the results of the morning breakout strategy in January 2020 using 15 minute candles and 1H.
15 Minute Candles
|W/L||Points Won||Points Lost||SL||Date||Running Total|
|Total Profit||190 points loss|
1 Hour Candles
|1 hour chart||SL||Points Won||Points Lost|
|Total Points Won||554||170|
These results mean that using the 15 minute candles, we had 19 trades with 4 winning and 15 losing or break even, giving us a 21% strike rate and a loss of 190 points. That makes some seriously grim reading.
However, using the 1 hour candles we had 13 trades with 7 winning and 6 losing or break even. This gave us a respectable 53% strike rate and a profit of 384 points.
8-9am the Crucial Factor
When you run tests like this, the information that you can gain is amazing. We can clearly see that by using the price data until 9 am that we have managed to turn our 190 points loss using price data up until 7.45am into a profit of 384 points by holding on for an extra one hour and 15 minutes before drawing in our highs and lows.
This also means that the size candles that you use up until 9 am are not particularly relevant as long as they are under 1H.
Why I like the Morning Breakout Strategy
I actually really like this this strategy and think that it could be great for new traders.
It is very easy to see what you have to do.
The risk reward is in your favour 2/1
There aren’t too many trades that it will drive you nuts.
You can start with a small bank
Trading times are easy enough to fit around working schedules.
Why I didn’t like the Strategy
The main reason that I didn’t like the strategy is that you will need to keep an eye on when you get a trade that opens as you will need to then cancel the one that wasn’t triggered.
That is easy enough to do though if you just set price level alerts on the chart using the IG platform. This way you’ll know when you should have an active trade in the market and when you’ll need to login and cancel the other one.
You do not want to have 2 orders in the market on the same pair when using this strategy.
Morning Breakout Strategy is a winner
Overall the strategy was certainly a winning strategy over the month of January using 1 hour candles with price data from 6am – 9am.
I’ll do some more testing over the coming months and update some more results come the last weeks trading in March.