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How to Trade Currency Using a Grid Strategy

   

grid trading uptrend (1)

What is a grid trading strategy, how does it work, and when is it most effective? We’ve outlined everything you need to know to understand grid trading in forex.

Grid Strategy Basics

A grid strategy allows you to preemptively map out entry and exit orders at set intervals, or “legs,” from the current market price. In doing so, you account for all possible breakout scenarios and ensure that, no matter what direction a trend takes, a pending order will be triggered to enter you into the trade. The number of levels (i.e., stop orders) placed in either direction dictates the size of your “grid.”

In a grid trading strategy, buy stop entry orders are placed above the current market price. These orders will automatically enter you into a long position if a bullish breakout occurs. Sell stop entry orders are then placed below the current market price to trigger a short position in the event of a bearish breakout. Grid strategies can be used in both trending and choppy markets, but they’re more effective in the former.

To visualize how a grid strategy is laid out on a price action graph, let’s look at an example:

grid trading graph levels (1)

The trading strategy on this graph is mapped out to have three levels (three above the current market price and three mirrored below). The current market price is 2.1350, and the trader has decided to place levels at legs one one-hundredth of a dollar apart. Many traders choose to calculate support and resistance levels and use those values as a guide for setting the legs of their grid strategy.

The next step to setting up your grid strategy is to take these established legs and levels and convert them into clear buy stop, sell stop, and profit-taking orders, as shown in the Grid Trading Strategy chart.GridTradingChart (1)

The take-profit values for each order are one one-hundredth away from the entry value (equivalent to the leg) so that when one trade is closed, another one is opened at the same level.

Possible Grid Strategy Outcomes

The effectiveness of your grid strategy depends in part on the way that price moves. In a trending market, price will inevitably break out of its current support and resistance band and move in one direction for a sustained period. In an ideal scenario, price would climb or fall consistently in one direction without oscillation, hitting all your stop orders and take-profit values in consecutive order. The next two images show an ideal uptrend and downtrend breakout scenario.

grid trading uptrend (1)

grid trading downtrend (1)

There are two other possible, imperfect scenarios that might occur in a trending market:

  1. Price might break out in one direction and then reverse to the other side, leaving a position open in the opposite direction.
  2. Price could oscillate in a way that opens a position but initially misses your take-profit point, subjecting you to greater losses.

The periods of loss that would result from each scenario are highlighted in red in the next graph.

grid trading losses (1)

If you’re able to identify this scenario, you can attempt to mitigate losses by placing additional stop loss orders to exit a trade in the event that price doesn’t immediately recorrect in your favor.

In a choppy market, it’s harder to predict the effectiveness of your grid strategy without a thorough understanding of the market. In some markets, price will consolidate, as illustrated by the next image.

grid trading consolidation (1)

Such erratic price movement will open all of your stop entry orders and hit all of your take-profit points. In such cases, it’s exceptionally important to keep tabs on your net wins and losses and know when to exit a trade.

The Pros and Cons of a Grid Trading Strategy

Perhaps the biggest advantage of a grid trading strategy is that it eliminates the need to anticipate the direction of a breakout. By creating a grid of pending orders, you can walk away from your computer with the assurance that no matter what direction price moves, you won’t miss a profit opportunity. That said, using a grid strategy can be risky if profit-taking values aren’t immediately reached after a position has been triggered. Furthermore, creating a large volume of pending orders inevitably means managing more trades. Although a grid strategy requires less manual trade action, it still demands frequent monitoring. As a trend manifests, you should close pending orders that are contrary to the current trend so as not to incur interest. In addition, you should watch triggered positions to ensure that price doesn’t reverse before hitting your established take-profit value (thereby leaving you vulnerable to substantial losses).

In order to create an effective grid trading strategy, it’s important to understand how your chosen market typically trends and how to manage risk and reward using other analytical indicators in your trading toolbox.

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.

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