What’s grid trading?
Grid trading creates a grid of orders at progressively increasing and decreasing prices. Grid trading is typically connected with the foreign currency market. The method places buy and sell orders at regular intervals above and below a base price to capitalize on asset price volatility.
For instance, a forex trader may place buy and sell orders every 15 pips above and below a predetermined price. This capitalizes on trends. They might also purchase below and sell above a fixed price. This leverages varying situations.
Understanding Grid Trading
Grid trading has the benefit of little market forecasting and high automation potential. However, not following stop-loss restrictions can result in significant losses, and running and closing several positions in a large grid is complicated.
With-the-trend grid trading aims to capitalize on prolonged market movements by increasing the position. Buy orders increase when the price rises, expanding the position. The position grows and profits as the price moves in that direction.
This creates an issue. The trader must decide when to close the grid, exit transactions, and profit. Otherwise, the price may drop, erasing earnings. While equally spaced sell orders restrict losses, the position may have gone from lucrative to losing by the time they reach them.
Many traders restrict their grid to five orders. They put five purchase orders above the price. They depart with a profit if the price hits all purchase orders. All at once or using a sell grid starting at a desired level.
Choppy price activity can trigger buy and sell orders above and below the predetermined price, resulting in a loss. The trend-following grid fails here. A prolonged price trend makes the technique most profitable. Price fluctuations seldom yield beneficial benefits.
In oscillating or ranging markets, grid trading against the trend works well. The trader places buy and sell orders below and above a predefined price at regular intervals. As prices decline, traders become long. Rising prices generate sell orders, reducing long positions and perhaps shorting Traders profit from sideways price oscillations, which generate buy and sell orders.
The against-the-trend grid lacks risk control. The trader may build a better losing position if the price stays in one direction instead of fluctuating. Traders must establish a stop-loss level to avoid holding lost positions or increasing them indefinitely.
Grid Trading Buildout
Grid construction requires numerous processes.
- Choose a 10-, 50-, or 100-pip interval.
- Set the grid’s initial price.
- Choose a with- or against-trend grid.
Imagine a trader starting at 1.1550 and using a 10-pip interval on a with-the-trend grid. Place purchase orders at 1.1560, 1.1570, 1.1580, 1.1590, and 1.1600. Place sell orders at 1.1540, 1.1530, 1.1520, 1.1510, and 1.1500. This method involves exiting while things are going well to secure gains.
Assume the trader uses an anti-trend grid. They start at 1.1550 and have an interval of ten pips. They purchased at 1.1540, 1.1530, 1.1520, 1.1510, and 1.1500. Their sell orders are 1.1560, 1.1570, 1.1580, 1.1590, and 1.1600. This approach triggers buy and sell orders to lock in gains but requires a stop loss if the price swings one way.
EURUSD Grid Trading Example
Consider a day trader observing the EURUSD range between 1.1400 and 1.1500. The trader uses a 10-pip interval against the trend grid to profit on the price range at 1.1450.
The trader sells at 1.1460, 1.1470, 1.1480, 1.1490, 1.1500, and 1.1510. Stop loss is 1.1530. This limits risk. With all sell orders triggered, no grid purchase orders, and the stop loss reached, the risk is 270 pips.
They also purchase at 1.1440, 1.1430, 1.1420, 1.1410, 1.1400, and 1.1390. Their stop-loss is 1.1370. All buy orders, no grid sell orders, and the stop loss trigger 270 pips of risk.
The trader expects the price to fluctuate between 1.1510 and 1.1390. They also hope the price doesn’t go too much outside that range, or they’ll have to sell at a loss to limit risk.
Conclusion
- Grid trading includes putting buy and sell orders at predetermined intervals around a price.
- The grid can capitalize on trends or ranges.
- Place buy and sell orders above and below the stated price to profit from trends.
- Place buy and sell orders below and above the stated price to benefit from ranges.
