Grid trading is a method that helps traders benefit the most from market volatility in the forex market. But why specifically the forex market? Well, the reason is that in the foreign exchange market volatility is more important for traders than in any other market.
Certain financial markets are much more stable than the forex market. For instance, the real estate market is known for its stability throughout time. So it would be rather foolish to rely on short term movements in prices to make profits in this market.
However, the forex market is one in which even the tiniest changes in prices can be used to obtain profits.
There are many strategies that are designed to do just that – i.e. take advantage of price fluctuations in the market. One such strategy is known as grid trading. And that is what we are going to discuss in this article. What is grid trading? How does grid trading work? What are the advantages and disadvantages of grid trading? And finally, how can you use grid trading in forex?
What Is Grid Trading in Forex?
Grid trading is one of the smartest trading strategies in forex whereby the trader will go about placing multiple orders in the market with their brokers in order to make sure that they can benefit from volatilities in the market.
So traders can place a high number of either buy or sell orders with their broker. The reason so many orders are placed at the same time is kind of similar to hunting.
Imagine you go hunting for rabbits or any other small rodent. To increase your chances of catching your prey, you might opt to place several traps in different places. You do this in the hope that one of your traps might just be the one that catches your prey.
Similarly, in grid trading you place several orders at different ranges. In this situation you have the advantage of having laid a large net. Your large net in the market can catch any volatility that you might have otherwise lost.
So when the market fluctuates in either direction, it will set off one of your orders, and in this way you are reassured that at least one of your orders will be triggered and activated by the volatilities in the market.
So if the market is not giving you a clear signal for entry point, then it might just be the time to use grid trading strategy.
How Is Grid Trading Strategy Implemented?
We can consider a number of features for grid trading and how it works.
The first one is of course the number of orders that are placed. With other strategies, we normally place one or two orders with our broker. But with grid trading you place several orders.
The way these orders are placed is that each one is placed at a specific price point. Normally, a fixed amount of interval is considered for these orders to be placed at.
Furthermore, each one of these orders will have the same stop loss and take profit levels.
Once these specifications are made for the order, you wait for the market to make its move. And once the market gets a grip of your orders, it will move up and down and when the market price hits either one of your orders, that order will be activated and executed by the broker.
When Is Grid Trading Profitable?
Under normal conditions, it might just be rather easy to pick on the trends that exist in the market. Trends that might be clear cut and explicitly in one direction.
However, there are times that the trend in the market is not so clearly noticeable.
During these times, we can say the market is in a range. Naturally, one strategy that you can use when the market is in a range is range trading.
But another strategy that could work even better is grid trading. When you have detected a range instead of a specific trend, you can place a grid of orders at different price entry points. And when the range moves in an unpredictable way, then one of your orders will be triggered.
Therefore, when prices are oscillating to and fro in a range, that is the most opportune moment to use grid trading strategy.
What Are the Advantages of Grid Trading?
As we discussed above, not always can you find a specific trend in the market. Specific and clear trend lines can help you find a rather highly accurate entry point.
But there are times when the market only moves up and down between two trend lines. Or maybe it is just moving sideways – i.e. there is a sideways trend in the market.
Then these times are when we see the biggest advantage of grid trading over other trading strategies. The reason is that in these situations it is more difficult to make the right decision and the odds of making a mistake are much higher.
But with grid trading you can lower the risk of making mistakes and at the same time increase the chances of your accurate finding of the entry point.
Furthermore, grid trading removes mental biases and trader sentiments from the equation. This is because you do not have to think too much about your position and especially you do not have to make predictions about the future price movements.
At the same time, there are also automated trading systems or trading bots that can help you with this specific process. In fact, trading bots can make grid trading even easier than it is.
But you need to constantly monitor your automated system. Because if go unchecked, an automated trading system can make errors with grid trading.
What Are the Disadvantages of Grid Trading?
One of the disadvantages associated with grid trading can be found in the example we provided at the beginning about hunting. As a hunter who is using “grid trading” method of hunting, you place many traps. But imagine only one of them works. You have done all that work for only one to work. And now you have to do it all over again.
Well, this is exactly what you get with grid trading. A small amount of profit. But if you are diligent enough, and you repeat these trades adequately, you can obtain a significant amount of profits. But it takes time.
Another disadvantage of grid trading is its limited application. It is only useful when the market is moving in a range. At the same time, breakouts from the range are also possible.
So, if you have open positions as part of grid trading, and the market breaks from the range, you can incur losses.
Grid trading is a strategy for trading that is well suited for a market such as the foreign exchange market. This strategy is most suitable for when the market is moving in a sideways trend or it is moving in a range.
At these times, you can use grid trading and place several orders at different price intervals in the market. And then when prices move in their range, you won’t miss your chance to make profits, because one of your orders will be set off and triggered by the movement – even if it is in a range.