This article explains how the Grid Strategy minimizes the risks and maximizes the profits, how the grid works and what money management rules you should know before trading grid.
The grid trading strategy
The Grid trading strategy is easily automated. That means you do not have to be glued to your computer's screen all day long. Also grid trading makes profits even when the market is volatile. So no matter where the price moves, the grid is able to pick up the profits from any direction of the price move, in case you have tuned your system correctly, of course. The bad news is that the grid trading system is a rather complicated strategy which requires some trading experience and knowledge. If you haven't traded grid successfully yet, it is high time for us to bring this strategy into the focus of your attention.
Grid trading is a system of trading, mainly popular on Forex. This strategy makes profits from both sideways and trending market. Grid trading helps to maximize the profits.
How the grid is formed
The design of the Forex trading grid depends on the trader's strategy and risk tolerance. Nevertheless, most grids generally look quite similar.
All of them have a common structure - a visual grid in the chart, where the moving price rate comes through the levels and "picks up" the result of preset parameters.
For example:
The chosen interval is 10 pips
The
current price is 1.3550
Buy orders are at 1.3560, 1.3570, 1.3580, 1.3590
Sell orders are at 1.3540, 1.3530, 1.3520, 1.3510
As soon as the price rises to the first buy order at 1.3560, the trade opens. If the price rises by 10 more pips, there are 10 pips of profit.
Simultaneously, the second trade is open as the buy order is activated at 1.3570. If the price keeps increasing, the process will go on.
Money management
No strategy will work instead of you. Especially when we speak of risky strategies, promising many profits. But when automated properly, it works for profit-making sometimes even better than manual trading. However, proper automating requires a total understanding of market sentiment and trend tendencies.
Grid trading is no exception. There is a pattern in a grid, a so-called "dangling trade" which occurs when one of the orders is activated but price reverses before reaching the take profit.
Stop loss and take profit
Take-profit (TP) and stop-loss (SL) are the two critical things fixing your profits and limiting the losses. They should be set up beforehand.
In fact, a TP level should be 2-4 times higher from the entry point than the stop loss. This way you minimize the risks and maximize the chances of getting profit. If the TP is executed, the profit will cover the possible losses.
For example:
If the SL is set at 10 pips below the entry point,
the TP should be set at 30 pips.
Some experienced traders with large accounts don't use stop loss, relying upon the price reverse before the loss turns too big.
One more thing you should remember is that the trading risk shouldn't exceed 1-2% of the trading capital per single trade. Once a trader opens a sell stop or buy stop order, the first thing you should do is to place the stop-loss, and only after that plan a take-profit level.
What assets to choose
First, choose what instrument you are going to trade. Avoid using more than one instrument in one grid, as keeping multiple instruments in one grid is extremely risky.
Another important thing to keep in mind is the typical spread of the currency you choose. The interval size in your grid will depend on the spread volume.
Grid strategy traders often prefer low-spread currencies with high volatility, like the USD/JPY, EUR/USD, EURCHF, or EUR/JPY. They usually choose pairs which price behavior is familiar to them.
The size of the grid
After the instrument is chosen, determine your grid size. This means you have to decide how many orders you are going to open. As we have mentioned before, you will need several orders opened simultaneously, and most traders do not recommend grids with more than 10-15 orders since the trade becomes too complicated and risky in this case.
Grid-intervals
The common patterns say: the bigger the spread, the larger should be the intervals.
Usually, a standard interval is 10-20 pips. So if we multiply each interval size to the number of orders discussed above (5-15), you will see that your grid size can be from 50 to 300 pips. There are short-term grids and long-term ones. The grid size varies depending on the strategy operation time.
If you feel confident enough to try the grid strategy completely risk-free, it might be the right time for you to open a demo account.
Remember, while building the grid system and placing multiple orders, keep your profit low to reduce unexpected losses. Do not hesitate to implement backtesting and make sure you feel comfortable executing grid strategy. Take your time before trading on a live account.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
