Algo Trading: Step-By-Step Guide To Range Breakout Strategy
The guide advises backtesting the strategy against historical market data before committing real capital.
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.
Understanding the approach
Algorithmic trading uses computer code to execute buy and sell orders automatically once predefined conditions are met. It removes the delays and uncertainty that come with manual trading, allowing trades to be carried out faster and in a consistent way.
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.
Setting entry and exit rules
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.
Applying risk controls
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.
Testing before deployment
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.
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.
From paper 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.
Disclaimer: The views expressed here are those of the author and do not represent the views of NDTV Profit or its editorial team.
