Grid trading is an approach where a trader sets buy and sell orders at the predefined price. This creates a grid-like structure that attempts to remove the hassle of knowing the direction of the price but is a very risky trading strategy that can cause signficant drawdowns. I would much prefer to use detailed market analysis when placing my forex trades rather than implementing a grid trading system.
What is forex Grid trading?
The concept of Grid trading is to get the most out of volatility by placing buy and sell orders at regular intervals above and below a set price. Grid trading can be conducted on any chart timeframe and markets, including forex, stocks, commodities, indices, cryptocurrencies and more.
A Grid trader tries to take advantage of the ranging and trending conditions. If they want to try and profit from the ranging conditions, they could place buy orders below and sell orders above the predetermined price. And if a trader wants to profit from the trending conditions, they could put buy order below and sell orders above the predefined price.
For instance, if the market is ranging, a trader could place a buy order 10 pips below each interval and sell order 10 pips above each interval.
If the price moves in the traders direction without triggering multiple orders, they could close all trades with a profit. However, it is also possible that all of the grid trades get executed and the trader then ends up in a dangerous position with multiple trades open and great risk exposure. I have often seen grid trading systems deplete accounts and thus, it is not a forex trading strategy I would consider myself.
Here’s an explanation of the trend and ranging conditions with the Grid trading.
a. Grid trading in trending conditions
The Trend-Grid concept is that if the price moves with the trend, this creates more significant positions. As the price continues to step up, there is a rush of buy orders, which results in a more substantial position. Ultimately, if the price remains in the same direction, a trader could benefit.
One of the advantages of Grid trading is, it reduces the effort of predicting the market. This way, a trader in trending markets can place buy and sell orders at every interval with the set price. However, without any form of market analysis, the positions are not well thought out and can lead to signficant losses.
There are specific measures a trader needs to take with the Grid trading in trending conditions. If the price remains with the trend, a trader must know how to end the Grid and exit. Or else, in a price reversal, a trader could wipe out their account. Although sell orders, set equally like buy orders, can put a bandage on these losses. But, by the time the price will reach these sell orders, the position could have caused a margin call.
Therefore, the trader can try to limit their orders when creating a Grid in trending markets. Regardless, I personally find grid trading very high risk and would avoid it.
Let’s say a trader picks a starting point of 1.1235 at a 10-pip interval. They place buy orders at 1.1245, 1.1255, 1.1265, 1.1275, 1.1285. They place sell orders at 1.1225, 1.1215, 1.1205, 1.1195, 1.1185. For profits, they need to determine an exit point.
b. Grid trading in ranging conditions
When trading against the trend, Grid trading becomes more active. The idea is, if the market is ranging, a trader set buy orders below the predetermined price at regular intervals. Conversely, a trader places sell order above the predefined price at regular intervals.
If the price falls, a trader enters a buy trade, and if it rises, they begin a sell trade. This way, the trader tries to profit from both buy and sell orders as long as the price is in ranging conditions.
However, a significant drawback in ranging markets is, if the price continues to go in one direction, it creates larger losing positions, as the trader is trading against the trend. Therefore, setting stop-losses can control some of the losing positions.
Suppose a trader selects a starting point at 1.1250 at a 5-pip interval. They set buy orders at 1.1245, 1.1240, 1.1235, 1.1230, and 1.1225. They set sell orders at 1.1255, 1.1260, 1.1260, 1.1265, and 1.1270. They try to make profits from both buy and sell orders, but they place a stop-loss because the price could move in one direction and wipe the account out.
How to build a Grid?
For building a Grid, a trader needs to:
Choose an interval such as 10, 15, 20 pips.
Find the starting price of the Grid.
Determine the ranging or trending conditions.
Forex Grid Trading Conclusion
Grid trading involves placing multiple buy and sell orders in order to try and profit from whichever direction the market moves in. Applying Grids in ranging markets can be more effective than trending markets.
Regardless, grid trading systems can get very messy very quickly and I have often seen them cause large drawdowns and blown trading accounts. Therefore in my humble opinion, grid trading is very dangerous trading strategy.
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