Grid trading involves placing financial market orders above and below a set price on a trading platform. This creates a grid of orders that incrementally increases and decreases. The premise of grid trading is to capitalize on average price volatility in an asset by placing buy and sell orders at specific intervals above and below a predefined base price. For example, a trader would place a buy order every 20-pips above a set price and a sell order every 20-pips below that price. The trader will attempt to take advantage of ranging market conditions.
What is Grid Trading?
One significant advantage of grid trading is that it requires minimal forecasting of market direction. However, we need to weigh the downside of such a strategy, including heavy losses if the trader fails to use stop-loss limits to help protect their capital.
So, how would traders put grid trading into practice? To construct a grid, there are multiple steps to follow, which include:
– Choosing an interval, such as 10/50/100 pips
– Choosing a starting price for the grid
– Figuring out whether the grid will align with trends or ranges.
For example, the trader chooses to trend trade with the starting point at something like 1.1150 using a 10-pip interval. They would place buy orders at 1.1160, 1.1170, 1.1180, etc. Then, they would place sell orders at 1.1140, 1.1130, 1.1120, 1.1110, etc. If the trader decides to range trade, using the same starting point of 1.1150, with 10-pip intervals. The trader would place buys orders at 1.1110, 1.1120, 1.1130, 1.1140, and sell orders at 1.1190, 1.1180, 1.1170, 1.1160, etc.
Both strategies require you to lock in profits as the buy and sell orders execute, but you will also need a plan for managing losses such as stop orders. Overall, a comprehensive grid trading plan can prove itself in being a lucrative strategy if the trading plan remains balanced and accounts for unexpected shifts in market sentiment.