Introduction to Algo Trading in India
Algorithmic trading, also known as algo trading, uses computer code to execute buy and sell orders automatically once predefined conditions are met. This approach removes the delays and uncertainty that come with manual trading, allowing trades to be carried out faster and in a consistent way. In our previous article, we outlined the basics of algorithmic trading and explained how it differs from manual trading. This article sets out a step-by-step guide for retail investors to create, test, and run a range breakout strategy through an algorithmic trading platform.
What is Range Breakout Strategy?
The range breakout method begins with selecting a fixed period at the start of the session to define price boundaries. For example, traders may mark the highest and lowest levels reached between 9:15 am and 9:45 am. These levels then set the range for the strategy. A position is entered once the closing price of a five-minute candle breaks through the established range. A long position, for instance, is opened when the price crosses above the breakout high. The exit can be determined in two ways: a target profit or a reversal signal where the price falls back within the range.
Risk Management in Range Breakout Strategy
Risk management is built into the strategy. A fixed stop-loss, such as 150 points below entry, can be applied to cap potential losses. A trailing stop-loss may also be used to protect profits. Unlike a fixed stop, a trailing stop adjusts automatically as the market moves in the trader’s favour. This approach helps to minimize losses and maximize gains, making it a popular choice among Indian traders.
Backtesting the Range Breakout Strategy
The guide advises backtesting the strategy against historical market data before committing real capital. Backtesting produces key metrics such as win-loss ratio, average profit or loss, maximum drawdown, and risk per trade. These results help to measure performance and fine-tune the rules. By analyzing these metrics, traders can refine their strategy and make informed decisions about when to enter and exit trades.
Example of Range Breakout Strategy in Action
In one example, a 30-minute range led to a breakout at 10:25. By sticking to the rules, the strategy captured a 140-point gain, showing how automation avoids premature exits that are common in manual trading. This example illustrates the potential benefits of using a range breakout strategy in the Indian stock market.
From Backtesting to Live Trading
Once backtested, the strategy can be applied to paper trading, where it runs under live market conditions without financial exposure. If results remain consistent, it can then be moved into live trading. The process takes traders from defining rules through to execution, with each step designed to reduce discretion and maintain discipline. By following this approach, Indian traders can develop a systematic and informed approach to trading.
Conclusion
In conclusion, the range breakout strategy is a popular and effective approach to algo trading in India. By following the step-by-step guide outlined in this article, retail investors can create, test, and run a range breakout strategy through an algorithmic trading platform. Whether you are a seasoned trader or just starting out, this strategy can help you make informed decisions and achieve your trading goals. For more information on algo trading and other trading strategies, please visit our website and follow us on social media.
Some other popular trading strategies in India include mean reversion strategy and momentum trading strategy. These strategies can be used in conjunction with the range breakout strategy to create a comprehensive trading plan.
