Grid Trading: What is it? How does it Work? Ultimate Guide & Strategy

Trading concepts

Grid Trading

Are you investing in a currency exchange or Forex market and want to know all about grid trading? Then you don’t need to look further.

Grid trading is one of the most popular investment strategies among currency pairs or Forex investors. It involves a series of buying and selling on an automated basis. This particular strategy is highly rewarding because it enables investors to capitalize on the changes in prices of currency pairs on a constant basis. 

Grid trading is also known as fishing net trading because this strategy functions like a fishing net. Currency pairs are fish constantly going up and down. Whereas, the strategy is the fishing net as it involves the simple trading principle of buying low and selling high. In other words, the fishing net is always ready to grasp fish constantly going up and down. That means, grid strategy always seeks to catch currency pair prices at low and vice versa.

What is grid trading? How does it work? How to use it in Forex markets? And much more is going to be learned in today’s guide. In fact, this guide is simple but detailed to enable you to learn all you need to know about grid trading but in the most simple words. Let’s dive deep to learn without wasting a sec!

What is grid trading? 

Grid trading, as we already know, is one of the most popular strategies employed by Forex traders. This strategy is based on the simple and well-known principle – buy low, sell high. So, the core principle of grid strategy is to generate a series of buy and sell orders to buy low and sell high. In other words, it involves taking full advantage of small price fluctuations regularly occurring in Forex markets. 

Furthermore, grid trading relies on automated trading facilities. Why so? Because it involves a series of buy and sell orders that are automatically completed when the price of a particular currency pair falls within the given range at a chosen point of time. It is also important to note that the goal of this strategy is not to look for huge gains. Conversely, it revolves around making small but frequent gains. 

It is also very apt to call grid trading fishing net trading. Forex markets are just like a lake where currency pair prices constantly go up or down just like fish going up or down constantly. Moreover, the idea here is to grasp the fish on both ends – up as well as down. Grid strategies work just like a fishing net and catch prices at both up and low levels. Thus, grid strategies capitalizes on small but frequently occurring fluctuations in Forex markets.

How does grid trading work?

Grid trading involves creating a series of buy and sell orders. But how do you map out these orders? In fact, you decide entry and exit points at set intervals based on the current market price of a currency pair. It isn’t a simple decision to set those points. You have to forecast and account for all possible breakouts to make sure your orders get triggered irrespective of the direction of the price movement. 

How do you place buy and sell entry orders when employing a grid strategy? You can place buy orders above the current market price and sell orders below the current market price. So, buy orders, when triggered, automatically initiate a long position after a bullish breakout. Conversely, sell orders, when triggered, automatically initiate a short position after a bearish breakout. That said, the main advantage of grid trading is that you can trade in both bullish and bearish trends. However, it is important to note that grid strategies are more effective in the trendy market than choppy markets. 

Grid trading strategy explained through an example

Let’s try to understand what we discussed earlier through an example. Suppose that the current price of a currency pair is 2.235. Now, you decide to employ a grid strategy and choose to go with three levels – three above and three below the current price. The best idea is to calculate support and resistance levels to decide your entry points. 

You can set buy stop orders at three intervals – the first one at 2.245, the second at 2.255, and the third at 2.265. Whereas, you can set sell stop orders at three intervals below the current price – the first one at 2.225, the second at 2.215, and the third at 2.205. That means you chose to set the first stop order at one-hundredth away from the current price. And, the second stop orders are at the same distance as the first and so on. Thus, the strategy automatically opens a new position when the first one is closed.

What are the possible outcomes of the grid trading strategy? 

Now, it is interesting to understand what are the possible outcomes of the grid strategy. As the grid strategy is a great one in trending markets, its effectiveness depends on the trend. The way price moves play a big part in defining your outcomes. For example, a strong bullish trend will make prices break resistance levels and go beyond. In such bullish trends, price is highly likely to sustain an uptrend for a considerable period. So, the price is more likely to hit your buy orders above the current price. 

Contrarily, a strong downtrend in the market usually breaks the support level and goes below. In such bearish trends, price is highly likely to drop for a considerable period. So, the chances of price hitting your sell orders below the current price are also high. However, it is important to note that it happens during strong trending markets. So, what may happen if things don’t go as planned? 

If the trend isn’t ideal, then there may arise two imperfect scenarios. The first scenario is – price breaks out in one direction but reverses to another direction before hitting your all targets. So, it leaves a few of your positions open. Thus, it curtails your profit.

The second scenario is that price goes in the right direction and opens your position but doesn’t hit your take profit target. So, you have to bear losses when it happens. However, you can mitigate your losses by placing extra stop-losses to exit a trade in case of an adversary. 

Advantages and disadvantages of grid trading

Grid trading is among the most popular types of trading, especially among Forex traders. It offers numerous advantages. However, everything has some limitations and grid trading also brings some limitations or disadvantages. 

Advantages

  • It is among the most simple trading strategies. You don’t need to conduct detailed research to develop this strategy. In fact, it is one of the best and easiest strategies for beginners to get started with profitable trades. 
  • Almost all trading strategies require traders to do a lot of market research, technical analysis, and much more. Conversely, this simple strategy doesn’t require you to go for such detailed analyses. It doesn’t matter whether you are anticipating trend direction or not to forecast breakouts.
  • Another great advantage of grid strategy is that it is fully automated. You don’t need to sit in front of screens all day long. It frees you once you are done with creating buy and sell orders. You can go wherever you want with the peace of mind that you won’t miss a trade no matter which direction the market goes.

Disadvantages

  • It may lead you to losses if your order targets don’t get hit. That said, grid trading also accompanies risks just like other trading strategies. 
  • It requires a lot of time and effort despite the fact that it is fully automated. You have to carefully create buy and sell orders along with the price range. These parameters are of significant importance even when using grid bots.

Bots for grid trading

Grid trading is one of the trading strategies that look simple on paper but are extremely difficult to implement. Because grid strategies involve creating a series of buy and sell orders at intervals. Pretty simple! The fact that this strategy is implemented automatically makes it look more straightforward. Right? No! Absolutely not! It is not that simple. 

Moreover, if we forget about automation and implement grid trading strategy manually, does it sound good? Again no because creating buy and sell orders manually for grid trading takes too much time. Manual work is also more prone to errors. So, we can say that automation is better. But, how do you automate grid trading? The answer is grid trading bots. Thanks to modern technology and state-of-the-art trading platforms, you have automation tools at your disposal. 

Grid trading bots automate your trading after you place buy and sell orders within a certain price range. Additionally, these bots handle all incremental steps in grid trading. For instance, when one buying order gets hit, the bot automatically places the next buy order according to the parameters you set. Similarly, when a sell order gets triggered, the bot automatically places the next sell order as per your instructions. 

There are numerous trading platforms that also provide you with grid trading bots. However, it is important to consider the following factors before using a bot for your grid trading strategy. 

Factors to consider before using a grid bot

1. Fees – Trading platforms charge extra fees for using grid bots. Given the fact that grid trading involves a lot of small trade orders, even insignificant fees add up to become significant in the long run. Therefore, it is important to consider the grid bot fees that a platform charges.

2. Know about key support and resistance levels – Although grid trading doesn’t require you to do detailed technical analysis, knowing key areas of support and resistance is important. You need to understand it because these key areas help you in determining the price range accurately. 

3. Market analysis – Again, knowing to conduct detailed technical analysis isn’t necessary for grid trading. However, it is important to know about market trends and price action patterns. You know, knowledge is power and in trading, knowledge gives you the power you need. You can accurately choose a price range with market analysis. There is no doubt about grid bots lifting the burden off your shoulder through automating your trading, it is your hard-earned money at stake. Therefore, don’t just rely on grid bots to do the trick. Instead, do your part to maximize the odds of success. 

Advantages of using a good grid trading bot

Grid trading bots automate grid trading. Isn’t that enough? The answer is no. This isn’t the advantage. It is what grid bots are supposed to do – to automate grid trading. Moreover, we also pay fees for using the bot. There are certain other advantages you should seek

1. User-friendly – The grid trading bot must be user-friendly. The fact that mostly newcomers use grid trading, easy to use bots is better. They should make it effortless for traders. In other words, it should be easy to understand and run. Otherwise, it will make grid trading extremely difficult for traders, especially novices. That said, a goof grid bot will always be an easy tool to use.

2. Easily automated – Grid bots must also make automation effortless for traders. Traders should easily create orders with minimal effort. So, a good trading bot will always enable you to automate effortlessly. 

3. Reliable – Bots must also be reliable. They should not ever fail or lag when running. They should be able to execute grid trades for traders even when the trader is offline. 

The wrap-up

Grid trading is among the most productive and perhaps the most popular type of grid trading. In fact, it is the favorite type for Forex traders looking to maximize profits and minimize losses. The strategy revolves around creating a series of buy and sell orders within a particular price range. That means the strategy involves making a lot of trades to take advantage of price fluctuations. That’s why it is also known as the fishing net strategy. 

Grid trading is a simple but highly profitable strategy. The main advantage of grid trading is that you don’t need to conduct any detailed analysis. Basic knowledge of a few areas is enough for the execution of this strategy. The main drawback of this strategy is that you may incur losses if your order doesn’t get triggered. 

Moreover, grid bots are the tools that help you in grid trading. However, it is important to choose a bot carefully as you may incur significant fees. Moreover, the bot must be user-friendly, easy to understand and run, and reliable. 

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