WHAT IS GRID TRADING?
Grid trading is a strategy utilized by significant investors and hedge funds. The term "grid trading" derives from the practice of placing orders across a specified range at predetermined intervals, creating a grid-like pattern. This technique, also known as "averaging down," progressively improves the average price with each trade opened. Grid trading offers several advantages. It requires minimal market forecasting, with the only prediction necessary being that the market will not move exclusively in one direction without pullbacks. Predicting volatility is typically more straightforward than predicting direction. Moreover, grid trading strategies lend themselves well to automation. Many profitable EAs available on the MQL marketplace employ grid strategies.
Traders knowledgeable in grid trading gain a significant edge over those who simply close positions when facing drawdowns. Partial take-profits can also be considered a form of grid strategy: partially closing a profitable buy trade before reaching the take-profit level resembles selling the security at those levels. While grid strategies often boast a high probability of success, using them incorrectly can quickly deplete trading accounts. This underscores the importance of understanding the strategy and, more importantly, having access to effective tools, which can save traders considerable time and money.
HOW IT WORKS? (EXAMPLE)
Let's suppose the trader predicts that a certain security will increase in value in the future. A buy trade of 1 lot is opened at a price of 100. However, instead of rising, the price falls to 90. Rather than closing the trade at a loss, the trader remains convinced that the price will rise and deems the current price as unrealistic. As a result, the trader decides to open another buy trade with a lot size of 1.5. Despite this, the price continues to move against the trader, dropping to 80. Despite being in a drawdown, the trader remains composed and opens a final buy trade at 80, with a lot size of 2.25. If the price continues to fall and the floating losses of the three trades reach $250, the trader will close the position with a loss. However, the price eventually returns to 90 after the third attempt. Despite being below the original buy price of 100, the trader still realizes a profit because the last trade had a larger volume than the first one. The combined profit from the three trades is $15. The trader decides to close the positions, realizing the $15 profit. In this example, the trader used grid trading to turn a losing trade into a profitable strategy.PARAMETERS
In order to gain a better understanding of the strategy, let's introduce some parameters to define how it works.
- Startprice: This is the price at which the strategy initiates, typically where the first buy order was placed. In the example above, the start price would be 100.
- Range: The range defines the price interval within which trades are executed. In the example above, three trades were executed: the first at 100, the second at 90, and the third at 80. The range in this example is 100 - 80 = 20.
- Volume: This represents the volume used to execute trades within the grid. In the example above, the three trades had volumes of 1, 1.5, and 2.25 respectively. The total volume, also known as the volume cap, in this case, is calculated as 1 + 1.5 + 2.25 = 4.75. The starting volume is 1.
- Volume Step: The volume step defines the ratio or difference between the volumes of consecutive orders. In the example above, the second trade had a volume of 1.5, whereas the first had only 1. This implies a multiplication factor of 1.5 between consecutive orders: 1.5 x 1 = 1.5, and 1.5 x 1.5 = 2.25. Alternatively, if the volume step were defined as the difference or addition to the previous volume, the orders would have volumes of 1, 1.5, and 2.0 with an addition of 0.5 lots.
- Density: The density refers to the number of orders or trades executed within the range. In the example above, the density was 3 because three trades were executed. If the trader were willing to enter another trade at 70, this parameter would be 4, and the range would be 100-70 = 30.
- Risk: This represents the amount of money the trader is willing to risk on the strategy. In the example above, the trader was willing to lose $250, so the risk was $250.
- Gain: This is the amount of money the trader aims to make from the strategy. In the example above, the trader closed the trades when the floating profit reached $15, so the gain was $15.
Here for example is the range 0.4703-0.44958 = 0.02072 or 2072 points. The Density is 6, because a trade was opened and 5 orders were placed. The Volume step is here defined in an addition: the volume difference between the orders is 0.1.
DIRECTION
The Direction is another important aspect of the strategy. In both examples provided so far, only buy trades were executed, based on the prediction that the price would increase. However, Grid trading can operate in both directions: shorting a security in predefined intervals is also feasible. For instance, consider a grid strategy with a Density of 5, a Starting lot size of 1.1, or a Volume cap of 6.78, with a range of 1749 points (the display shows 1751, as achieving a perfect representation is sometimes not possible).
But what if the trader cannot predict the direction of the security, and the only forecast they have is that the price will range? There is a solution for this as well: placing a sell limit order above the price and a buy limit below the price, each activating their own grid. If the price goes down, reaching the buy limit order, the sell limit will be deleted, and the buy grid will be activated: a buy limit order would be placed under the current buy trade. If the price goes up, reaching the sell limit, the buy limit will be deleted, and the sell grid would be activated above the price.
CLOSING WORDS
Grid trading is not for everyone. This strategy usually has a bad Risk-Reward ratio which is why many people avoid it. I personally have been using grid strategies successfully, trading against the crowd, using the fxssi OB snapshots. Whenever around 40% of retail traders are in a profit, and most of them are on the same side, it is wise in my experience to bet against them. To make sure I capture the pullback, I initialise a grid strategy instead of entering a single trade. The software I use to create my automated grid strategies (it's display is used in the examples above) is the ManHedger EA. Here is how you can use it to create grid strategies.
I wish you good luck with your trading journey!
