Forex Grid Trading Strategy Explained
Highly profitable in any direction. It seems complex, but in reality, it's easy. Is this too good to be true? Welcome to our article on the Forex Grid trading strategy, other times referred to as the trading grid strategy.
This short guide will provide you with a detailed explanation of what this trading strategy is, how to implement the grid system, some examples of scenarios that may occur as a result, its advantages and disadvantages and will clear up any confusion you may have.
Table of Contents
The Forex grid system has become quite popular among traders because it's easy to visualize. However, it is important to know that there's no guarantee. If you want to succeed with the grid system, you must know how to execute the system correctly. To use strategies related to the Forex grid system, you have to understand:
- The way the market works
- Current market dynamics
The good news is this something like an automated strategy, which uses buy and sell stop orders, eliminating the stress of trading strategies in which the trader must open and close positions manually. Another great thing about this system is that it helps you get a return on your investment even in volatile market conditions.
This way, it eliminates the need to predict the market's direction, making the choice quite simple. The trader just has to know that the market is going to make a move, and the strategy will take care of the rest. Trading with this strategy can be applied to more than one instrument. For example, bituniverse grid trading may use a similar strategy.
It's also important to use a broker with no trading commissions. These conditions will limit the maximum levels of this trading system. Another great thing about the grid strategy for Forex is that it works in trending markets as well. However, the downside is that the trader always has to keep the available margin in mind – especially, in trending markets.
Defining the Forex Grid Trading Strategy
The Forex grid trading strategy is a technique that seeks to make profit on the natural movement of the market by positioning buy stop orders and sell stop orders. This is performed on a predefined market distance (referred as to a leg), with a preset size of take-profit and no stop-loss.
This kind of trading removes the variable of knowing the direction of the price move. However, this also means very complicated money management conditions. Moreover, it increases the margin of error, because you will have to manage multiple trades at the same time.
A Hedged Grid System
A grid strategy can be considered a hedged system - because it entails a system of loss protection. The idea is that any some of the losing trades might be offset by profitable trades.
In an ideal situation, the entire system of trades can become positive. At this point, you can close all of the remaining positions and will have realized a profit. However, there isn't a guarantee that your system of trades will always net a profit. This is why using a strong strategy based on education and experience is as essential with this strategy as it is with any other prediction-based forex trading strategy.
Now that you understand how this works, it's time we discuss the pros and cons of this strategy.
Implementing the Forex Grid System
Now, I'll introduce you to two scenarios in which this is can be called a successful grid trading strategy for a trader with good risk measurement. Then I'll introduce a scenario in which the grid strategy results in losses.
First of all, decide on a starting point. For example, take a look at the current price of 1.11860 as featured in the chart below:
Source: Admiral Markets Forex Demo Account - EURUSD 4-hour chart - Data range: October 16, 2019, to November 4, 2019. Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
Next, choose the number of grid Forex strategy levels – in this example, there are three levels. Now, place three buy stop orders above the current price starting at 1.1186, and three sell stop orders below it, starting at 1.1126. Note that there are other ways to plot the grid's leg – pivot points, chart formation, support and resistance, etc.
Furthermore, the number of levels is not restricted. You can change both the number of trades and the size. However, use caution when making changes, as the possible size of the loss can increase with each one.
|Level||Order Type||Entry||Take Profit|
|1||Buy Stop Order||1.1186||1.1196|
|2||Buy Stop Order||1.1196||1.1206|
|3||Buy Stop Order||1.1206||1.1216|
|-1||Sell Stop Order||1.1126||1.1116|
|-2||Sell Stop Order||1.1116||1.1106|
|-3||Sell Stop Order||1.1106||1.1096|
After placing the orders, one of three scenarios can occur. Two of them are favourable for the trader. The first one is when the price moves in one direction (either up or down) – this liquidates all the trades in that direction and hits all your take-profits. Then, you simply close the remaining Stop Orders.
The second scenario is that it opens all the orders and hits all the take-profits.
The third, unfavourable trading scenario, involves the price opening some positions without hitting your Take-profit and retreating into the opposite direction. This, in turn, leaves one position open and accumulates loss.
The third scenario illustrates the biggest drawback of the Forex grid system strategy and also highlights an important general point for traders. Namely, you must possess the ability to psychologically deal with losing positions. Being a good trader has less to do with overall profitability, and more with the ability to learn. A good trader can always turn a loss into a positive learning experience.
When should you “close” the grid?
When trading with a grid, it’s usually best to view the entire grid as one “system”, instead of trying to manage the execution of each trade individually. This perspective also allows for simple management of your trades.
With this hedged system, an ideal outcome for your grid is when the price reaches all of the levels either on the top or the bottom half of your grid, but not both.
If the price turns and steadily moves in one direction, then you will need to consider the chances of a reversal, which will cause you to lose your profit. Ideally, you close your orders before a reversal.
In another approach, you close out some trade pairs as they reach a specific profit target. With this approach, you may be able to reach higher profit targets by letting your profits run.
The disadvantage with this approach, however, is that you don't know how long you will need to wait for the trades to run their course. As a result, your capital and margin remains held in your account.
When using a grid strategy, once a level is executed on one level, some traders decide to cancel the order on the opposite level. This prevents unnecessary costs (in both swap and spread fees) that result from having two opposite trades open at the same time with a fixed profit outcome. Because opposing pairs cancel one another, traders don't benefit by holding both sides open.
Imagine the level 1 buy opens and the price drops back down, reaching low enough to execute the sell order at level -4. Here you would close the open “buy”, and cancel the sell order before it gets executed.
Manage Your Risk
Here are some key points that traders with a strong risk management strategy employ in their trading:
- Remain aware of the fact that if there are non-opposing trade pairs that are closed independently from one another the system can lose its hedging feature and allow for unlimited losses. This is the reason traders choose to set wide stop losses on all of their trades – as a safety measure.
- If you are operating in a runaway market or with currencies that have low liquidity, trades might not execute at the exact levels in the grid, which can leave you with great exposure.
- It's important to have a clear understanding of the most likely market range to ensure you set your exit levels appropriately.
- Make sure when setting your lot sizes and grid configuration that your account won’t be overexposed at any point that could cause a margin call.
- The primary advantage of using this grid system is the averaging of your exit and entry prices. This is a method that shouldn't increase your risk level, but reduce it.
Lastly, with grid trading in any market, it’s important to not be tempted to multiply your order volume and your exposure to levels beyond your affordable risk limits.
If you want to try this strategy out in a real trading environment without risking any money, you can sign up for a free demo account with Admiral Markets by clicking the banner below. Yep, zero-risk trading with real market data:
Is the grid system for me?
Now that you are familiar with this system, I'll leave you with some of its advantages and disadvantages, to help you better understand what it entails and whether or not it is for you.
- Less screen time: When using this strategy, the only thing you need to do is set up your grid, which usually takes a couple of minutes. After this, your grid will trade for you within the boundaries you've set with your buy and sell stop orders.
Later on, as the market takes a different direction, or if there are changes in your equity, you'll need to change the configuration of your grid. However, if you use a strong strategy based on experience and education to set up your grid, sometimes it can remain trading with the same settings for weeks, months, or years.
- No intense analysis or special forecasting: Unlike many other trading strategies based on predicting movements in the market, this strategy does not require you to predict when nor which direction the market may turn. With this strategy, you can choose a trading direction and be wrong about your prediction for almost about a thousand pips before you need to be concerned.
- Independent of any timeframe: Grid strategies don't analyse high, low, close, and open prices to decide when to make trades. Their behaviour doesn't change, regardless of the chart's timeframe. In other words, traders can change the timeframes on their chart without affecting their trading.
- Regularly extracts money from the market: Grid strategies close trades often and consistently. When the spacing is met, the trades are executed. If you use wide spacing to reach wide price ranges, you're executing trades regularly.
- Pre-calculated risk: With a grid, you pre-calculate your total exposure and size of your trades before it begins trading.
- Can profit in either direction: This is the only trading strategy that allows traders to earn profits when the market goes in either direction. For example, if you set up a long grid and the market drops, if there is enough fluctuation in the market during that fall, you might net a profit during this movement.
- Appears complex and illogical at first: Commonly, people are familiar with placing one trade based on their predictions, using a stop loss and a take profit order. With the grid strategy, you place many trades without a take profit or stop loss and, instead of focusing on a single trade, you focus on the validity of the price range you cover.
- Incorrect grids can create large losses: If you set up your grid to perform aggressively, you might find yourself in a margin call. It's important to measure your risk before you establish your grid. However, some traders use a grid trading ea to help them with this. For example, a grid trading python bot or a pz grid trading ea, which might pre-display risk and exposure and refuse to trade open-ended grids.
However, automated trading isn't always as profitable as it sounds. Automated trading comes with its own set of risks that can impede any trading strategy and amount to lost funds and time. Any trader needs to research the validity of any bot and consider whether or not they can take on the risks before deciding to buy one.
- Grids aren't a set-and-forget strategy. For grids to function well, they need educated traders. There aren't any grid settings that are profitable forever. This is because your equity and the market trading range change after some time. Using the Metatrader Tester is great, but traders won't find a setting that will generate profits forever.
- It requires patience: Sometimes, the grid might expand without closing any trades with a profit. At the same time, liquidating a grid can require weeks or months. To use the grid strategy, you will need patience. This is not a trading strategy for those who are in trading for the thrill of it.
- It entails a paradigm shift: Traders are used to focusing on a single prediction-based trade. When starting to use the grid strategy, they need to shift their paradigm to think about the trading range and the grid as one deal.
- It requires a large balance: The grid strategy is not suitable for accounts with a low balance, unless a trader is using a cent account, in which a change of one pip is divided by ten. If you are using a micro-lot account, you will need a $5,000 balance, minimum, to be able to set up meaningful grids that will be able to regularly cash-in.
If your account balance is too low, you will have to use higher spacing between your trades, which will reduce your cash-in frequency.
- Not NFA/FIFO compliant: The grid strategy can be so profitable that institutions and large banks convinced the NFA to forbid traders from using it. US brokers aren't permitted to allow this type of trading. If you find a broker who can legally permit you to do it, you may be able to try trading grid online.
In short, if you don't have much of time to trade the market, and you are looking for a trading approach that might allow you to regularly cash-in on trades without much intervention, grid trading is worth considering.
Trading With Admiral Markets
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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. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.