Grid Trading Strategy - Learn How That Works

The Foreign Exchange market is not only driven by speculators but also by real-money accounts forced to buy or sell certain currencies versus their peers at the current quote. Those accounts are related to export and import companies acting as global trade players, absorbing changes in the market sentiment, and sometimes slowing down the price action.

For example, if a major change in monetary policy announced in some country or region, and it’s getting obvious that the appropriate currency will gain strength or weakness, the overall structure of the market would not change immediately. Currency pairs are the most liquid assets in the financial markets due to huge trading volume operated on a daily and weekly basis.

Thus, the market players might take advantage of a sustainable trend, increasing speculative positions once rates reach a certain level. This trading system is called Grid Trading, and it could be used for both trending market conditions and choppy consolidative price action.

What is Forex Grid Trading?


The main idea is to set several postponed buy orders above the price or sell orders below the price. Those orders are triggered when the rate grows or declines by an equal distance in pips. The approach is aimed to maximize potential profits from a sustainable trend and stable change of the price.

Grid trading is most commonly associated with the foreign exchange market.

With-the-trend grid trading forex technique


In this case, Forex traders set a certain number of postponed buy-orders above the current price or sell-orders below the current price. The overall trading volume grows together with the trend and after the general direction is confirmed. The increasing trading volume is gradual, which allows avoiding too many risks at the very initial stage of the trend when the situation might not be so clear.

The distance between those order might change from one currency pair to another depending on the volatility and other market conditions. It could reach a range of 50-150 pips for high-volatile pairs like GBP/JPY or USD/MXN, for instance. The most liquid pairs could have a lower augment such as 30-75 pips for EUR/USD or USD/CHF as those pairs move much slower amid higher trading volume. As a result, once a currency pair reaches the pre-set level, the postponed order is getting triggered, opening another trading position with accordance to the current trend.

The aim is similar to the buy-and-hold (or sell-and-hold, depending on the trend’s direction) strategy based on a long-term perspective. Forex grid trading allows automatizing the trading process in case if the trend is sustainable and the direction was determined accurately. However, the analysis, both fundamental and technical, must be made precisely as wrong assumptions could lead to significant losses.

Against-the-trend grid trading system


If the current market conditions are determined as sideways consolidation, in the long run, it’s worth considering to set buy orders below the current price and sell orders above it. In this case, forex traders do not follow the recent shift in quotes, but open trading positions against it, counting on a reversal in the price action. As a result, choppy price action could give more profits from trading in both sell- and buy-side if there many reversals in the price action during a certain period.

The number of postponed orders and the distance in pips between them could be the same as per the previous method. That depends on the amplitude of the sideways range, and the volatility for any given currency pair. However, traders considering against-the-trend grid trading method should monitor the market sentiment closer compared to with-the-trend approach, and delete postponed orders in case if the market conditions changed.

Another kind of risk is related to situations when the market fails to maintain the consolidative price action, and a crucial breakthrough happens, significantly shifting the sentiment. In this case, a spike in the amplitude and higher volatility could trigger postponed orders in different directions at the same time, which would influence so-called lock with a fixed loss wherever the price goes. Although there are different ways how to manage the lock, opening and closing it several times together with price fluctuations, that’s an undesirable outcome, especially for beginners as it weighs on the emotional background. Thus, the against-the-trend technique is more dangerous.

How Grid Trading Works?


Grid trading strategy is based on a long-term perspective. Before considering the system, traders should determine the long-term trend’s direction first, assess the potential depth and distance of the trend and make sure that the fundamental and technical backgrounds confirm each other. It’s obvious that implementing the grid approach on intraday charts like 1-hour or 30-minutes timeframe does not come in line with the overall strategy. Larger time frames such as weekly and daily charts have a much more significant influence and weight for the technical analysis, thus those periods have to have a crucial value in terms of the trend’s direction and possible distance between the orders.

If you like this strategy, you might also be interested in this Channel Trading Strategy

Setting the grid strategy


After the long-term trend is determined, forex traders should decide what would be the best number of postponed orders and the distance in pips between them. Typically, the grid consists of five orders with equal ranges between the levels. However, those factors could be changed depending on any particular individual trading strategy, asset class and current market conditions. Nevertheless, choosing the best number of postponed orders, as well as calculating the augment, has to correspond to the money management rules.

Free margin control


Traders should keep a clear forecast of the free margin left after all of the postponed orders would be triggered to avoid the overload pressure on the account balance. Another way of forecasting different scenarios and the possible impact for the overall profitability is to use a what-if algorithm, describing all of the possible outcomes in a step-by-step analysis.

Example of Grid Trading


Screenshots below show a backtest of the grid strategy applied to different market conditions.

Adding by-the-trend short positions for EUR/USD


The daily chart indicates the downtrend started in June 2019. Since the initial entry-level at 1.1350, EUR/USD triggered five more short positions with a distance of 75 pips between postponed sell-orders. Every time the exchange rate declined to the pre-set quote, the general trading volume was increasing gradually, while profits were growing together with the trend. Although the downtrend had several bullish retracements, the general bearish sentiment kept weighing on EUR/USD, adding profits every two weeks on average.
Grid Trading Strategy - Learn How That Works

Opening USD/JPY longs against the trend


Assume a trader forecasted a bullish reversal for USD/JPY which was in a long-term downtrend. The analysis showed a possible reversal range of 104.50/106.50 amid several factors including possible intervention from the Bank of Japan, oversold technical conditions, long-term psychological support mark and so forth. The grid to buy the pair was set with five postponed orders and 50-pips difference between the levels. As a result, the USD/JPY currency pair reversed the downtrend after triggering the last order at the bottom and soared more than 350 pips in less than a month. All of the positions were profitable at the end of the period.
Grid Trading Strategy - Learn How That Works

Pros and Cons of Grid Trading System


Pros:
  • Maximising profits from sustainable and gradual trends;
  • Keeping the risks balanced as the trading volume is increased only after the confirmation about the trend’s direction;
  • Multipurpose methods for different market conditions;
  • With- or against-the-trend approaches for several scenarios;
  • Automating the trading process on the long-term perspective.

Cons:
  • High requirements for the account balance and free margin;
  • Possible lock;
  • Some of the trading positions might appear under the water for quite a while.

Conclusions - Grid Trading


The grid trading forex suggests a scrupulous analysis with the long-term view. At the same time, it allows forex traders to automate the trading process in case if the trend is gradual and sustainable, which would lead to increased profits with a balanced profit/loss ratio. At the same time, traders should maintain the money management rules, forecasting several scenarios and keeping a reasonable number of postponed orders and augments. The main risk of the system is related to a sudden change in the current trend, which could trigger orders in both directions at the same time.
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