Grid trading is a popular trading method that was actively used in many different markets including cryptos and stocks. However, it is also one of the riskier methods that can both make huge profits and blow trading accounts if approached irresponsibly. Modern grid trading is an automated approach and there are many free Expert Advisors to deploy this strategy and avoid placing orders manually. In this guide, we will explain what grid trading is, if it’s still profitable today, and what to do to control risks.
How grid trading works
The main idea behind grid trading strategies is to place buy orders below a set price while sell orders are always placed above a set price. This forms a “grid”, hence the name of this strategy. Grid trading strategy makes profits by capitalizing on short-term price fluctuations in the market. However, if there is a strong trend then the strategy is highly risky and is famous for blowing up trading accounts much like martingale methods. Some methods even combine grid trading with martingale which is even riskier and not recommended. However, when deployed in stable markets with sideways movements, grid trading can make profits. In fact, it is a very good idea to have confirmation that there is no strong trend going on before placing grid trades.
Key parameters
To place grid orders, traders need to choose a price range, grid spacing, number of orders, and stop-loss mechanisms. The space and price range depend on the instrument and timeframe selected. However, most grid trading strategies will use lower timeframes, unlike swing and trend trading methods. These parameters need to be adjusted depending on the market volatility. For example, gold moves much more and tends to be in trends more often than EUR/USD which moves 2-3 pips on 1-minute and even 5-minute timeframes. As a result, the grid space and price range will be different for these instruments.
A practical example using the EUR/USD pair
Let’s select EUR/USD for our hypothetical grid trading implementation. Suppose our price range is 1.2000 to 1.1210 and grid levels are spaced every 10 pips. We will use limit orders as this order type is most suitable for grid trading.
- Buy limit orders at: 1.2090, 1.2080, 1.2070, 1.2060, 1.2050, etc.
- Sell limit orders at: 1.2110, 1.2120, 1.2130, 1.2140, 1.2150, etc.
As we can see, if the price fluctuates between the price range, then grid trading will be profitable. However, if there is a strong trend then grid trading is not recommended.
Pros and cons of grid trading
Here are the advantages of grid trading:
- Automation – Modern grid strategies are mostly automated and allow traders to automate decision-making and minimize emotional trading.
- Profits from range markets – Exploits small price fluctuations in stable markets.
- Flexibility – Grid strategies are easy to adjust and optimize to ensure they stop trading during strong trends.
The disadvantages of grid trading are the following:
- Depends on market conditions – It works best in range markets and is super risky in trending markets.
- Risks – If too many positions are accumulated then traders might need additional money to open positions.
Risk management techniques in grid trading
When deploying highly risky strategies like grid trading, risk management is critical. As in any financial trading, grid trading also benefits from strong risk management methods like stop loss orders. Traders should limit position sizes to ensure they have enough margin to open the necessary number of positions to profit from markets. Backtesting is critical when trying to develop profitable methods and grid trading is an exception. Traders should first check if the strategy would perform well on historical data and then test it on a demo account.
Overall, grid trading requires traders to implement strong risk management and approach trading with discipline.
Add Comment