The London Reversal System for daytrading
What is the London Reversal System?
The day starts in the east. The Asian trading session is followed by the European (London) session. The London session is followed by the US session. The US session is followed by the Asian session, and so on. When one session transitions into another, there is often volatility in the markets. It is not uncommon for prices to break out of the price channel of the previous session, only to return to this established channel afterwards.
This example shows the transition from the Asian session into the London session starting at 08:00. Notice the downward trend and the range of the Asian session. Transitions from session to session are precisely what the London Reversal System trades. It is a daytrading strategy. The strategy focuses on forex and market indices. Although the strategy is called the London Reversal System, it can be used whenever one trading session transitions into another.
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Volatility
The London Reversal System is a counter-trend strategy. The strategy assumes that break-outs from the trend established by the previous session, are false break-outs. The price should therefore revert back into the price range set by the previous session.
Traders extend the price channel by adding a fraction of the average true range (ATR). This adjustment adapts the channel to take into account the market volatility. These are the blue channels. The market price must break out of the channel for a signal to occur.
Tip: The London Reversal System has many fans. The ICT (Inner Circle Trader) youtube channel is an example. Videos are available on the ICT channel.
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- A buy signal occurs when the market crosses below the blue channel i.e the session low minus the ATR buffer.
- A short sell signal occurs when the market crosses above the blue channel i.e. the session high plus the ATR buffer.
The London Reversal System's logic is based on the volatility when one session transits in to the other. The signals must therefore occur within one to two hours of the start of the new session. Traders can select this time setting in the NanoTrader platform. The zone during which signals can occur, is indicated by a continuation of the grey background after a session ends.
A buy signal
The price crosses below the blue channel. This is a buy signal. The signal is indicated by the NanoTrader as a green background in the chart.
A short sell signal
The price crosses above the blue channel. This is a short sell signal. The signal occurs within the allowed time zone after the end of the Asian session.
When to close a position?
The London Reversal System sets a profit target and uses a stop loss. Traders use the ATR to calculate the target and the stop. They are fixed values.
- The profit target is 5x the 20-period ATR.
- The stop loss is 5x the 20-period ATR.
The target and the stop loss are calculated in the same way. The return/risk ratio of London Reversal trades is therefore always 1:1.
Trade examples
This example shows a buy signal at the start of the London session. The profit target order (green line) and the stop loss order (red line) can be placed automatically by the NanoTrader platform. The price target is reached. The position is closed with a profit.
This example shows a buy signal. The price does indeed return in the channel established by the Asian session. However, the profit target is not reached. The price goes down and reaches the stop loss order.
Implement this free trading strategy
Follow these steps in the NanoTrader Full platform:
1. Open the chart of the instrument you want to trade.
2. Select the strategy in the "WHS Strategies" folder.
3. Activate "TradeGuard+AutoOrder" in the chart to trade semi-automatically or "AutoOrder" to trade automatically.
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