Nadex "London Breakout" Strategy: Is the GBP/USD Heading for a Reversal?

Since June, the GBP/USD "London Breakout" strategy using Nadex binary options has been remarkably consistent. Until the past week or so.

In a nutshell, the rules for this strategy are very simple:

• Select the Daily (3PM) binary option expiration.
• The low or high of the daily session will reveal itself between 2am and 5am EST, usually after the open of the London financial markets at 3am.
• The opposite high or low will appear between 8am-2pm after the opening of the New York financial markets.
• If the LOW of the day is identified between 2am-5am, then BUY at the lowest strike price that satisfies your risk/reward criteria.
• If the HIGH of the day is identified between 2am-5am, 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 4:30am 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:

Click on Chart to Enlarge

At 2:00am, the market ground downward, before reversing direction and forming a high at 3:55am. The market drifted back down until the release of economic news from the UK at 4:30. All reports

Image Courtesy of Investing.com

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 to near its former level. By 7:00am, 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 and history 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 reliable, high probability strategy.

To View a video of this strategy, click below.
The "London Breakout" strategy starts at the 42:46 mark.

The Purpose of this Blog

The Inquisitive Trader will be used  to share my experiences as an investor getting back into trading the markets. In June 2014 I joined the staff at TradingPub, and I am responsible for helping to book speakers for free webinars. Each week, I am exposed to a wealth of information from leading industry experts who teach how to trade the financial markets. When I come across interesting trading strategies, I will summarize my thoughts and share a link to the archived webinar. As I develop my own trading plan, I will also share some of my personal successes and failures. Responsible comments are welcome, but to avoid flaming posts and spam, I will be moderating all comments. I hope you find this blog useful, and wish you the very best on your journey trading the markets.

Disclaimer

The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.