Most Forex trading strategies and tools are geared towards predicting future price direction. However, there are strategies and techniques that are productive no matter where the price goes.
Grid trading is a trading strategy that aims to catch a price movement no matter the direction. The strategy can be easily automated. What’s more, grid trading can be used by both intraday and swing traders.
Grid trading is a strategy where traders buy and sell currency pairs at predetermined prices. In the following guide, we will be discussing what is the Grid trading strategy in FX and how we can use it.
Core features of Grid trading strategy
- Ideal for currency pairs: GBP/USD
- Ideal chart time frame: 5/15-minute timeframe
- Required time per day: Can be automated, so it can take just 1-2 hours from your day
- Required indicators: ATR, Fibonacci, and any other indicator providing support and resistance levels
How does Grid trading work?
Forex Grid trading strategy is a common and straightforward trading strategy that can be implemented by both experienced and novice traders. This is a trading strategy where traders place limit orders in a pre-defined range set by different indicators and support and resistance levels. When trading with a Grid trading strategy in FX, traders can take advantage of trends, or they can trade against the trend in a ranging market, which is a more simple and safe approach.
When trend trading with a Grid strategy, traders usually place buy and sell orders in specific intervals. For example, a trader can place a buy order every 20 pips above a certain price and a sell order every 20 pips below the set price. Consequently, if an asset goes uptrend, a trader can open multiple positions and realize profits at the end. This is a good strategy as it does not require much market analysis and forecasting. The system can make profits from both downtrend and uptrend markets. Grid trading can result in opening large amount of orders, which is not recommended in markets where spreads are too high. In addition, managing various orders simultaneously can be a challenge for some traders. Which is why many choose to automate and use trading algorithms to Grid trade. The algorithms have no human emotions and execute orders as they’re programmed to.
Range trading is another successful Grid trading strategy that makes this system more simple. When trading in a non-trend environment using the Range strategy, traders like to set support and resistance levels for an asset and trade within this range. In this instance, traders use different indicators such as Fibonacci, RSI, and other indicators that have a pre-defined range where price likes to move around. Once this range is set, then it is all about buying low and selling high. Here, traders place buy orders just above the support level and sell orders just below the resistance level. Once the price goes from support to resistance traders take profits, and then by opening short positions, they are trying to make profits from the likelihood of the price falling to support once again. Since most assets like to move around within these predefined ranges, traders can open and close multiple positions like this throughout the day. But of course, just like the Trend strategy, this Forex Grid trading strategy comes with its disadvantages. The biggest disadvantage of this strategy is that there are always possibilities that a breakout might occur and price might leave this pre-defined range. If the price falls below the support level, the position that has been opened just above the support level now becomes a losing position. As a result, it is crucial to have stop-loss implemented just below the support level, in order to limit possible losses. We also need to mention the problem that is also present in the trend trading strategy as well, which is not knowing when to exit the market. As we said, traders have sell orders just below the resistance levels where they like to short the market as prices are expected to go down. But during that time, they also most likely have an open long position that needs to be closed. But there are times when the human factor kicks in and some traders don’t close these positions as they think a breakout is coming up and prices are expected to continue rising. The issue here is that, even if prices continue to rise, there is a possibility that they will fall very sharply and the trader might lose all the profits he has made from that position up until now. Therefore, it is strongly recommended that traders just stay within the pre-defined ranges and take the presented profits. There is an option to move the stop-loss to the resistance level, if the breakout occurs and removes the possibility of making losses. But this requires traders’ attention and devolution of time, which is not something that is associated with this strategy. Grid trading is known as one of the easiest strategies to automate, and it does not require a huge investment of time from the trader.
Pros and Cons of Grind Trading Strategy
There is no perfect Forex trading strategy. Every strategy experiences drawdown and are best to use in certain conditions. What’s more, some strategies work in certain asset markets and fail in others. Therefore, it’s best to test your strategies before using them live.
Grid trading has its own strengths and weaknesses. This is an easy strategy to follow that does not require huge market knowledge or time dedication, but can become hard to manage if large amounts of trades get opened. Below, we will list some of the most notable pros and cons of Forex Grid trading strategy.
Pros of Grid trading strategy
- Does not require a trader to predict the direction of the market
- Can be traded in both trending and sideways markets
- Can be used by both experienced and beginner traders
- Can be easily automated
Cons of Grid trading strategy
- If the trend goes on for an extended period of time, the possibility of making losses rises
- If a trader accumulates a big number of open positions, the harder it becomes to manage these positions
- Can become ineffective in high volatile markets
- It requires huge patience and discipline from traders
- More profits can be made using other, a bit more complex strategies
Example of using Grid trading strategy
As we now know, there are two main strategies to trade Grid, one strategy is for trending markets, while the second strategy is for markets that move withing a range. Below, we will go over both Grid trading strategy examples in order to make it more clear how we can use them when trading Forex.
Grid trading in trending markets
In this example, we are trading with EUR/USD currency pair, using the Grid trading strategy. As we can see from the image below, we use the MACD indicator that has picked up an uptrend, and thankfully for us this uptrend really did happen. Here we then put buy orders that will trigger at the opening price and after every 10 pips. The opening price of an asset once an uptrend started, was 0.9964 and at the end of an uptrend, this price reached 0.9985, which means that we have opened 4 positions at the following prices, 0.9964, 0.9974, 0.9984, 0.9984. When we opened the last position, the indicator continued to show an uptrend, but prices started to move up and down. In order to realize profits and avoid potential losses, we closed all of our 4 open positions and took out profits we have made from them.
Looking at this chart, we can see that even if we kept these positions open for an extended period of time, we would still have made profits. But there was always a possibility of a sudden downtrend, and this is why it is always important to take out profits and not greed for higher gains.
Grid trading in a sideways market
Now let’s look at an example of a successful Grid trading strategy in a sideways market. Just like the previous example, here we are trading with EUR/USD currency pairs and use the Relative Strength Index indicator for setting a range we are going to trade with.
RSI sets a range of 100 to 0, and a smaller range of 70 to 30 within this range. When Grid trading, we can use this 70 to 30 range as resistance and support levels of an asset and trade within these ranges. As we can see, indicated by the first set of red arrows in the image below, RSI has come close to the support level of 30, and this is when we open our position. After this, we place a take-profit order just below the resistance level (70), and once it reached that mark, as indicated by the second set of red arrows, we close the position and take profits. After this, we simply wait for the indicator to go even closer to the resistance level, and once it came close to the resistance, indicated by the first set of blue arrows, we open a short position. Then, once the indicator came close to the support level, indicated by the second set of blue arrows, we closed the position and realized the profits. Looking at the last part of the chart, we can see that after that indicator started to rise and so did prices, which gave us another opportunity to open a buy position.
But when using this strategy, it is always crucial to have stop-loss and take-profit orders in place. Prices can easily break out from these support and resistance levels and continue to head in one direction, causing us to make losses.
FAQs regarding Grid trading strategy
How do you implement a successful Grid trading strategy?
First, traders should determine if the market is trending or moving sideways. After this, we need to decide in what range we will be trading or after how many pips will we open a new position. Then we simply need to implement take-profit and stop-loss orders, and our Grid trading strategy is ready. But this is just a brief overview and there are more parts that go into this.
Is Grid trading strategy good?
Yes, the Grid trading strategy is a good strategy, despite some traders not thinking the same way. While it is true that there are strategies that have higher profits, Grid trading is a simple strategy that can be executed by any trader in any market condition, it does not require big-time investment, and can be easily automated.
Are some currency pairs more useful for Grid strategies than others?
In general, traders can trade with any currency pair, as Grid trading can be effective during any market conditions. But it is suggested to avoid currency pairs that have high volatility, as it becomes harder to set up set prices and ranges around the asset that goes up and down on a constant basis.