Algorithm trading in a ranging market is much more like scalping. It’s a strategy that expects to have won a high number of trades compared to a few losses, and that the average win size is smaller in comparison to the average loss. Traders who choose a strategy (algorithmic or otherwise) for trading in a ranging market must be prepared for a larger number of signals, a higher number of winning signals, and smaller profits made per signal compared to the losses suffered when it is wrong.
Computerized trading has allowed the banks to trade more frequently, offsetting risks more quickly. It’s also introduced a lot more noise into the markets as the bank’s computerization looks for ways to attract ever more traders into the markets in their attempt to offload their risk of making a market to anyone participating in that market.
It may be hard to differentiate those systems that work best in a ranging market versus those that work best in a trending market because so many of them claim to win on a high percentage of their trades while also experienced large profits. This doubtful outcome is worth verifying. A trader considering alto trading needs to spend whatever time might be necessary to understand the philosophy behind the automation, that way they can carefully consider whether the algorithm and the system are actually going to be compatible with their personal trading style.
The ability to carefully consider and to sort through over the top marketing promises requires some effort though this effort is well placed. The only way to become wealthy for most people is to make their money work harder and smarter.
Below is a 1-hour chart of the EUR/USD showing price movement over a 30 day period:
During these 30 days, the currency experienced four periods (lasting a few days each) of defined trading ranges.
Traders looking to profit from ranging markets such as this hope to take many small profits along the way. Those indicators, computerized algorithms, or tactics used to identify signals in a ranging market will always employ the probabilities and expectancies of a profit harvester (many small wins, a few large losses).
Computerized automation can add significant value to traders who both fully understand the underlying probabilities associated with that program and who are willing to fully embrace all the trades that signal provides; employing proper risk management on every trade.
Market Traders Institute (MTI) has developed a full range of educational programs and charting automation to help traders make better, more consistent decisions on their trades so they experience a higher degree of success in their trading.