Grid Trading Definition

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Grid Trading Definition

What Is Grid Trading?

Grid trading is the process of placing orders above and below a predetermined price, resulting in a grid of orders with steadily rising and falling values. The foreign currency market is most usually connected with grid trading. Overall, the approach tries to profit on an asset’s usual price volatility by placing buy and sell orders at regular intervals above and below a specified base price.

A forex trader, for example, may place buy orders every 15 pips above a given price and sell orders every 15 pips below that price. This takes advantage of current trends. They might also make purchase orders below a certain price and sell ones above it. This takes use of a variety of circumstances.

Key Takeaways

  • Grid trading is putting buy and sell orders at predetermined intervals around a certain price.
  • The grid may be designed to capitalize on trends or ranges.
  • Place purchase orders at intervals above the given price and sell orders below the set price to benefit from trends.
  • Place purchase orders at intervals below the given price and sell orders above the set price to benefit from ranges.

Understanding Grid Trading

Grid trading has the benefit of requiring minimal predicting of market direction and may be readily automated. The danger of suffering big losses if stop-loss restrictions are not adhered to, as well as the difficulty involved with running and/or closing several positions in a vast grid, are major negatives.

The concept behind with-the-trend grid trading is that if the price advances in a consistent direction, the position grows to profit on it. More purchase orders are triggered when the price rises, resulting in a larger position. The position becomes larger and more lucrative as the price moves in that direction.

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However, this creates a quandary. Finally, the trader must decide when to close the grid, exit the transactions, and collect the gains. Otherwise, the price may fall and those earnings would be lost. While losses are managed by sell orders that are similarly spaced, the position might have gone from lucrative to losing money by the time those orders are reached.

As a result, traders usually restrict their grid to a certain number of orders, such as five. For example, they may put five purchase orders over a certain price. If the price passes through all of the purchase orders, they earn from the deal. This might be done all at once or via a sale grid beginning at a certain level.

If the price movement is choppy, it may cause purchase orders to be placed above the specified price and sell orders to be placed below the given price, resulting in a loss. This is when the trend-following grid breaks down. Finally, the technique is most beneficial if the price moves in a consistent manner. The price oscillating back and forth does not usually offer favorable outcomes.

Grid trading against the trend is more successful in oscillating or ranging markets. For example, the trader may put purchase orders at regular intervals below a certain price and sell orders at predetermined intervals above the price. The trader becomes long as the price decreases. As the price increases, sell orders are triggered, reducing the long position and possibly converting it to a short position. The trader makes money as long as the price oscillates horizontally, triggering both buy and sell orders.

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The issue with the against-the-trend grid is that it does not regulate risk. If the price continues to move in one direction rather than ranging, the trader may wind up building a bigger and larger losing position. Finally, the trader must establish a stop loss level since they cannot continue to maintain a losing (let alone larger) position forever.

Grid Trading Construction

To construct a grid there are several steps to follow.

  • Select an interval, such as 10 pips, 50 pips, or 100 pips.
  • Determine the grid’s initial price.
  • Determine if the grid will be trending with or against the trend.

Assume a trader sets a beginning point of 1.1550 and a 10 pip interval in a with-the-trend grid. Purchase orders should be placed at 1.1560, 1.1570, 1.1580, 1.1590, and 1.1600. Sell orders should be placed at 1.1540, 1.1530, 1.1520, 1.1510, and 1.1500. To lock in earnings, this method necessitates a departure while things are going well.

Assume the trader chooses to utilize an anti-trend grid. In addition, they chose 1.1550 as the beginning point and a 10 pip interval. They put purchase orders at the following prices: 1.1540, 1.1530, 1.1520, 1.1510, and 1.1500. They place sell orders at the following prices: 1.1560, 1.1570, 1.1580, 1.1590, and 1.1600. This technique will lock in gains when both buy and sell orders are activated, but it will need a stop loss if the price goes in just one way.

Example of Grid Trading in the EURUSD

Assume a day trader notices the EURUSD fluctuating between 1.1400 and 1.1500. Because the price is now approaching 1.1450, the trader decides to utilize a 10 pip interval against-the-trend grid to possibly profit from the range.

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A sell order is placed at 1.1460, 1.1470, 1.1480, 1.1490, 1.1500, and 1.1510. The stop loss is set at 1.1530. This ensures that the danger is limited. If all sell orders are activated, no grid purchase orders are triggered, and the stop loss is hit, the risk is 270 pips.

They also place buy orders at the following levels: 1.1440, 1.1430, 1.1420, 1.1410, 1.1400, and 1.1390. They set their stop loss at 1.1370. If all purchase orders are triggered, no grid sell orders are activated, and the stop loss is achieved, the risk is 270 pips.

The trader anticipates that the price will go higher and lower, or lower and higher, between 1.1510 and 1.1390. They are also hoping that the price does not move too much outside of that range, since if it does, they will be obliged to leave with a loss in order to limit their risk.

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