When traders deal with a particular currency pair for a long time, they start to observe certain characteristics and behavior of that currency pair. Such common behavior could be observed during market opening hours, closing hours, or major news releases. Traders may notice common behavior before and after the holiday season, such as Christmas or New Year.
Day traders enjoy the volatility of the market opening. This could be either Tokyo open, London open, or New York open. Some traders are familiar are with the pattern developed during the Tokyo open while some are comfortable trading the New York open. While some traders like to trade when the market is not extremely volatile, they prefer to trade when the market is quiet and less volatile.
The strategy we will be discussing today is based on the peculiar behavior observed in the GBP/USD currency pair. This behavior is mostly observed during the London opening hours.
The English breakfast tea method works well on the 15-minutes time frame. This means each candle represents 15 minutes of price movement.
This strategy is based on pure price action; hence we will not be using any indicators.
This strategy applies only to the GBP/USD currency pair.
The pattern is observed in GBP/USD before, and after the London market opens in the morning, we have named this strategy an ‘English breakfast tea strategy.’
We have observed that when GBP/USD trends in one direction from 04:15 hours to 8:30 hours London time, it tends to move in the other direction after 8:30 hours. We now compare the closing price of the 15-minute candle that corresponds to 04:15 AM and 08:15 AM London time to determine the direction of the GBP/USD. We then enter the market in the opposite direction at 08:30 AM London time.
For example, if the closing price of the 15-minutes candle at 08:15 hours is lower than the closing price at 04:15 hours, we go long at 08:30 hours. If the closing price of the 15-minutes candle at 08:15 hours is higher than the closing price at 04:15 hours, we go ‘short’ at 08:30 hours.
The stop-loss for the strategy is fixed at 20-30 pips depending on the point of entry on the chart and risk appetite. There are two profit targets for the strategy with risk to reward ratios of 1:1 and 1:2. In other words, the ‘take-profit’ would be at around 30 pips and 60 pips, respectively.
Since this strategy is based on the London time zone, we need to make sure that we change the trading platform’s time zone to ‘London.’ If this is not possible, we should know London’s corresponding time opening with respect to our time zone. Let us see the steps required to execute the strategy.
In the first step, we mark 04:15 hours and 8:15 hours London time on the chart. Then we look at the difference between the two candles. If the closing price of 8:15 hours is lower than the closing price of 04:15 hours, we then look for buying GBP/USD. On the other hand, if the closing price of 8:15 hours’ candle is higher than the closing price of 04:15 hours’ candle, we will for ‘short’ trades in the currency pair.
In the following example, we see that the market moves lower between 04:15 hours and 8:15 hours London time. The closing price of the latter is below the former. Therefore, we will take a ‘long’ position by executing further steps.
In this step, we examine the ‘entry’ part of the strategy. ‘Entry’ is the simplest part of the strategy where we enter the market at the close of the 08:30 hours’ candle. If the difference between the two candles marked in the previous step is negative, we enter for a ‘buy’ at the subsequent candle. If the difference between the two candles is positive, we enter for a ‘sell’ at the subsequent candle.
We can see in the below image that the subsequent candle dropped significantly lower. As per our strategy, we will take a ‘long’ trade at the close of this candle. Let us see what happens later.
In this step, we determine the stop-loss and profit targets for the strategy. The stop loss is usually set at 20-30 pips depending on the risk appetite of the trader. However, a technical approach for setting the stop loss is that, if the trade is taking place in the direction of the major trend of the market, we keep a small stop loss. If the trade is taking place against the major trend of the market, we opt for a larger stop loss. The first profit target is at 1:1 risk to reward, and the second one is set at 1:2 risk to reward. If we are trading against the trend, the first ‘take-profit’ ensures that we don’t lose any money even if the market turns around mid-way.
In the below image, we can see that the price hits our final ‘take-profit’ after taking an entry at the close of the red candle. Since the market was in an uptrend, we kept a small stop loss.
This strategy is based on a fixed time period, i.e., during the market opening hours. The rules are simple and specific. Any trader can try out this strategy to benefit from the volatility associated with the market opening. However, the currency pairs will change for other market openings. Since we are not giving much importance to the market trend, we might have some losing trades in the beginning until we become expert in the strategy.