An overview of Grid trading strategy - grid trading
- What is Grid Trading?
- How to create a grid for a Grid Trading strategy?
- Who is grid trading used for?
Trading in modern financial markets is associated with a lot of diversity. Some markets are characterized by strong trends, while others give the impression that they are in perfect balance, so the only thing a speculator can count on is endless consolidation. Accordingly, current traders are divided into different groups. A large group consists of trend followers who take positions in line with the dominant market trend. The next big group is the counter-rarians, who take a position opposite to the current trend. We can often recognize them by statements such as: "He is so tall that he can only fall" or "He can only rise, it will not be cheaper." Because of the above phrases, this group often becomes the object of bullying and jokes from the players. for which the transaction is based on the trend. It should be remembered, however, that counterparties make the most money when retreating from the main trend because they trade near key turning points.
Each strategy requires certain assumptions, each in its way defines the market along with the predicted scenario regarding the further direction of the market. Therefore, following a certain strategy, we need to know how it determines the trend and with what interval. Traders spend a lot of time defining a strategy that will be marked as “perfect”. All traders who regularly make profits in the financial markets have different investment strategies. Often these strategies are paradoxically mutually exclusive. What sets these speculators apart is that they generate positive returns. Therefore, you should not waste your precious time building an ideal system, but rather focus on what exactly we are looking for on the chart... If we are looking for strong trends, it is not worth testing the strategy on the market, which is characterized by strong consolidation. Let's start by identifying the trend, and only then we will apply this strategy. Thus, we come to an idea of what grid trading is and in which market it should be used.
What is Grid Trading?
Translated from English, grid trading means trading using a grid of orders. The idea is to place pending orders at an equal distance from each other. This system was invented by Forex traders. This is because FX is a very volatile market, where prices often return to the equilibrium point. It is enough to look at any currencies, and then you can see how the instrument moves in a limited range. Of course, this does not change the fact that some stocks contain strong trends that make the situation very clear to the trader. On the other hand, the situation in which a trader, regardless of whether he entered a long or short position, places a position at a loss raises strong doubts about the possibilities of making money on Forex.
The idea of grid trading is based on the previously discussed grid of orders, which are located at the same distance from each other. For example, if the current price is 1.1000 and we are interested in placing sell orders every 50 pips, then the first order will be placed at 1.1050, the next at 1.1100, and so on. Of course, the trader can also say that he is interested in buying at 1.0950, 1.0900, etc. Thus, the trader creates a grid of orders. Thanks to the use of this tool, the speculator assumes a certain course of events but leaves room for possible mistakes with the possibility of averaging a losing position. Due to this, even if the movement opposite to the occupied position becomes deeper, the trader has the opportunity to exit the trade in positive territory. Many active participants foreign exchange market may find at this moment that averaging losses is the biggest mistake novice traders make. It is impossible to disagree with this doctrine, which is why the correct position management is such an important issue, thanks to which we can determine the maximum allowable loss in advance.
The grid is a regular grid of orders, so it can hardly be called a mystical strategy that brings profit according to a magic formula or algorithm. The grid is not only an alternative to distributing an order across multiple levels but also an excellent strategy to use in a sideways trend.
How to create a grid for a Grid Trading strategy?
Network trading is a broader term for many online trading strategies that can be divided into many categories. First, let's discuss a situation in which there is no trend. This situation is often referred to as consolidation. The trader wants to make money regardless of whether the price goes up or down. The whole idea is to close profitable orders regardless of which direction the price is moving. Thus, if the price moves within a limited range, trades will be profitable, since most open orders will sooner or later close in positive territory. Of course, there will always be a situation when some of the open orders will bring significant losses. By closing all orders at the same time, we will publish loss orders. In connection with the above, it must be remembered that during the grid, we need to take into account the profit, exceeding the maximum capital drawdown. The system is ideal for currency pairs, as well as for other instruments that are characterized by long-term consolidations.
Another way to use this tool is to apply it on deep corrected tools. Using a grid tool, a trader with a certain probability determines the continuation of a given trend at a given value. For example, a trader has identified an uptrend on the H4 chart, however, he also saw deep corrections that are taking place in this trend. Taking into account the above and the analysis of the instrument, it is assumed that there is a high probability that this movement will continue. However, fearing a corrective move, he decides to create a grid with buy limit orders separated by a certain amount, for example, 50-80 pips. In the case of a downtrend with a deep correction, limit sell orders are placed in the same way.
The question arises, at what distance from each other should be placed subsequent orders. Is it always 50, 20, or maybe 100 points? The answer is obvious. There is no single value that we should use when creating a mesh. We can use the ATR indicator or Average True Range to help determine the optimal level for gridding. This indicator determines the average traffic range. It can be used to determine the distance between individual price levels.
As with any method of investing and speculating, position and capital management are essential in online trading to generate income. In the case of creating a grid of orders for an instrument that is in the process of consolidation, the trader must answer the question of how much he can risk using this strategy and when he decides to close the entire grid. While it is easy to determine when we publish a profit, it is much more difficult to determine when to reflect a loss. While this is frustrating, we must remember that you should always set an SL or you are risking the maximum amount of capital you have.
When trading using grid trading, the same principle applies to us, which states that trading is based on the protection of your capital. If we set the risk at 3% per transaction, we need to adjust the grid so that the maximum loss is the aforementioned amount. The biggest mistake we can make is mismanaging our capital, which puts you at risk of losing your entire deposit. It is worth determining how many levels there will be in this grid. If we determine that we have set a maximum, for example, 5 price levels at a distance of 10 points from each other, then in a situation where the price moves from the initial one by 60 points without any correction by 10 points, we will automatically close the entire grid, not creating the 6th level. This means that our stop loss is at level 6. If our strategy assumes risk of 3%,
Grid trading, which is designed to maximize profits without limiting losses, will always lead to bankruptcy of our account. Too many people are wasting money by ignoring the optimal SL setting.
What is grid trading used for?
Grid trading is a very good solution for people who trade securities in the process of consolidation. An alternative to using an order grid can be a situation when we trade instruments with a clear trend, but with deep corrections. The trader should remember that the simultaneous opening of buy and sell orders does not relieve him of the obligation to set the level at which he closes all open positions. This is because if the trend of the stock changes, we will have to pay more for it.
Therefore, it is worthwhile to carefully determine whether the grid we are creating is based on the assumption that the price will consolidate in a limited range, or whether we expect the trend movement to continue when the position is averaged. Thus, we will set up the optimal levels for opening trades and at the same time determine the level of losses at closing. Grid trading is a very good method of making small but regular returns on high volatility securities. However, to bring a specific profit to a trader, it must be specified in detail for all parameters, including closing the entire grid, both in terms of profit and loss.