At present, Forex grid style trading is one of the most popular trading strategies among traders because of its easy visualisation. However, you need to know that it does not ensure profits every time. Like any other system, if you want to be successful using the grid system, then you need to learn to execute it properly. To use this strategy, it is important to understand how the market works, the fundamentals, and the current market dynamics.
The advantage of the Forex grid trading system is that you can set it up as an automatic system so you do not have to place trades manually anymore. Even in the volatility of the market, a grid trading system can provide you with a return of investment. So, making a choice becomes very simple as the trader does not need to predict the direction of the market anymore. All we need to know is whether the market is making a move and the rest can be taken care of by this strategy. Moreover, the grid strategy works in the trading markets too, which is another great advantage. However, keep in mind that you need to be cautious about the available margin always, in trading markets, especially.
What is the grid trading strategy?
Grid trading is the kind of strategy where traders place orders above or below a set price. It creates a grid of orders at incrementally rising or reducing prices. It is an important strategy in the foreign exchange market. You can use this technique for capitalising on normal price volatility in assets. To do this, you will have to place buy and sell orders at specific regular intervals above and below the base price that is predefined.
How grid trading works
A benefit of grid trading is that it only needs a little forecasting of the direction of the market to get it automated. The basic idea of with-the-trend grid trading is the price moving in a sustained direction to the position getting bigger for capitalising on it. When the price is moving up, it triggers more buy orders which results in bigger positions. Further, the price runs towards the direction; the bigger and more profitable position you can have.
However, it also leads to a dilemma. Although the system is automatic, you have to determine the time for ending the grid and exit the trades. It is important to realise the profits before they disappear by the reversal of the price. This is why the grid is generally limited to a certain number of orders. By doing this, they can exit the market with a profit if the price runs through all their buy orders. They can do it either all at once or with a small grid that starts a target level.
When the price action is choppy, buy orders can be triggered by it above the set price which may lead to selling orders below the set price. If this happens, then the trader will have to suffer a loss. This is why the with-the-trend grid trading strategy is most profitable if you use it in a place where the price runs towards a sustained direction. It is best not to use it where the price goes back and forth because you will not be able to produce good results.
While the with-the-trend grid trading is useless in an oscillating market, you can go for the against-the-trend grid trading which is more effective. Assume a trade where the trader has placed buy orders at regular intervals and the orders are below the set price. On the contrary, he has chosen to place sell orders above the set price at regular intervals. As a result, the trader gets long when the price falls and the sell orders get short when the price rises. So, no matter what happens, you make a profit from both ways as long as the price keeps on oscillating sideways.
However, against-the-trend grid trading can be problematic because you cannot control the risk here. If the price does not oscillate sideways and continues to run in one direction only, then it will result in a larger losing position for the trader. You can protect yourself from this though; all you need to do is setting a stop loss level.
Construction of grid trading
If you want to construct a grid, then you need to follow these steps:
- First, select an interval. For example, it can be 10 pips, 50 pips, or 100 pips.
- Next, the starting price for the grid must be determined.
- Now you can choose which grid trading to use between with-the-trend and against-the-trend.
With-the-trend grid: If a trader chooses the starting point of 1.1550 with a 10 pip interval, then he will place buy orders at 1.1560, 1.1570, 1.1580, 1.1590, and 1.1600. The sell orders will be placed at 1.1540, 1.1530, 1.1520, 1.1510, and 1.1500. When things are in your favour, you need to lock in profits and for that, this strategy needs an exit.
Against-the-trend: If a trader chooses against-the-trend grid with the same starting point of 1.1550 and a 10 pip interval, then the buy orders and place orders will be just the opposite of what they were in the with-the-trend grid. This strategy already locks in profits; so, you will only need a stop loss, as mentioned before, to stop the loss if the price is triggered in one direction.
Implementation of grid trading strategy
After everything else is selected, you need to choose the number of levels for grid trading. For example, you may choose three levels to place three buy stop orders above the starting price. The three sell stop orders, on the contrary, can be placed below it. You can plot the grid’s leg in other ways as well, such as chart formation, pivot points, support, resistance and more.
After placing the orders, you will come across three scenarios:
- The price will move either up or down and all the subsequent take profits will be hit by it.
- The price will consolidate and it will open all the trades. All the take profits will be hit in this case too.
- All the subsequent take profits will be hit by the movements of price, but some trades will be left open.
If you implement a grid trading strategy the right way, then it can indeed help you earn huge profits. However, learn how to implement it properly before you use it.