Since June, the GBP/USD "London Breakout" strategy using Nadex binary options has been remarkably consistent. Until lately.
In a nutshell, the rules for this strategy are very simple:
- Select the Daily (3 PM) binary option expiration.
- The low or high of the daily session will reveal itself between 2 am and 5 am EST, usually after the open of the London financial markets at 3am.
- The opposite high or low will appear between 8 am-2 pm after the opening of the New York financial markets.
- If the LOW of the day is identified between 2 am-5 am, then BUY at the lowest strike price that satisfies your risk/reward criteria.
- If the HIGH of the day is identified between 2 am-5 am, then SELL from the highest strike price that satisfies your risk/reward criteria.
- If you can't determine the high or low of the market, or if it chops sideways, then don't trade this strategy.
The "London Breakout" strategy usually works very well on the release of economic from the UK. These reports are usually released at 4:30 am EST, and they normally have a dramatic impact on the market. If the news is bearish, the market can spike down 40 pips or more within a matter of minutes. If the news is bullish, the market can spike upwards dramatically. But lately that hasn't been happening as much. Let's take a look at today's session:
At 2:00 am, the market ground downward, before reversing direction and forming a high at 3:55 am. The market drifted back down until the release of economic news from the UK at 4:30. All reports from the UK were bearish. Under normal circumstances, there would have been a huge move to the downside, prompting a SELL order.
But the market hardly flinched. It dropped 18 pips on the news and promptly retraced back near its former level. By 7:00 am, the GBP/USD started on a rapid uptrend for the next several hours. At 8:30 am, bearish Durable Goods reports were released from the US, which further propelled the GBP/USD upward.
Why would the GBP/USD rise so rapidly on bearish economic news out of the UK? It could well be that the GBP/USD has hit a very hard level of support that it rarely penetrates. And when it does, it's usually very temporary in nature.
In this monthly chart of the GBP/USD, it's easy to see that a hard level of support has rarely been breached over the past ten years. When that level of support is breached, it is very temporary in nature. Also notice that the stochastics are currently extremely oversold. This market has formed an upside-down "V" pattern and has slammed into a support level that has held several times. Can it break through and keep going down? Sure it can, but the indicators suggest otherwise.
The GBP/USD tends to move in the opposite direction of the US Dollar Index. Let's take a look at that market for comparison:
The US Dollar Index is trading at 12-year highs, and the stochastics are extremely overbought. Is there more room for the dollar to climb? Sure there is, but all indicators suggest otherwise.
If the US Dollar Index retreats from its 12-year highs, then the GBP/USD will start climbing upward again, and may well display more predictable behavior. Until the US Dollar Index and GBP/USD resolve their current standoff, it would be wise to be very cautious with the "London Breakout" strategy trading with Nadex binary options. Under normal circumstances, this is a high probability strategy.
To View a video of this strategy, click below.
The "London Breakout" strategy starts at the 42:46 mark.
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The Trading Pub Team