Forex Grid Trading Strategy Explained

The Forex grid system has become quite popular among traders because it's easy to visualise. However, it is important to know that there's no guarantee.

Knowledge is power – if you want to succeed, you must know how to execute the system correctly. To use strategies related to the Forex grid system, you have to understand:

1. the way the market works;
2. the fundamentals;
3. the current market dynamics.

The good news is, you can set up an automatic Forex grid trading system which can remove the pain of manually placing trades. The great thing about a grid trading 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.

It is important to use a broker with no trading commissions.

These conditions will limit the maximum levels of the Forex grid 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 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 done 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.

Implementing the Forex Grid System

First of all, decide on a starting point. For example, take a look at the current price of 1.12360.

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 of 1.12360 and three sell stop orders below it. Note that there are other ways to plot the grid's leg – pivot points, chart formation, support and resistances, 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.

After placing the orders, one of three scenarios can happen. 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 in to 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.