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Forex Grid Trading Strategy - Detailed Explanation

April 20, 2021 10:15 UTC
Reading time: 13 minutes

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 a manual grid trading strategy, some example scenarios you can use it in, its advantages and disadvantages and will clear up any confusion you may have about this unique strategy.

trading grid strategy grid trading

Table of Contents

The Forex grid system has become quite popular among traders because it's easy to visualize and has some attractive advantages at first sight. These include:

  • It is partially an automated system: You set up a grid manually (a manual grid trading strategy)., Afterwards, it's something like an automated strategy using buy and sell stop orders, eliminating the stress of trading strategies in which the trader must open and close positions manually.
  • Allows for profits in volatile markets: 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.
  • Also allows for profits in trending markets:
  • Trading with this strategy can be applied to more than one instrument.

While these features may be attractive, it's important to know that there's never a guarantee. If you want to succeed with a manual grid trading strategy, you must also know how to execute the system correctly. You need to know:

  • The way the market works
  • Fundamentals
  • Current market dynamics
  • A broker's trading commissions and margin.

It's important to use a broker with no trading commissions. These conditions will limit the maximum levels of the grid trading system. While the grid trading Forex strategy works in trending markets as well, the downside is that the trader always has to keep the available margin in mind – especially, in trending markets.

Margin is the collateral that you'll have to deposit with your broker to cover the risk you'll generate for the broker. This is often a fraction of your open trading positions and is defined as a percentage. It's helpful to think of margin as a deposit on your open trades.

It can also be helpful to understand how to take advantage of other trading strategies and indicators to strengthen your grid. For example, you can use Gann lines to develop a Gann grid trading strategy or the Average True Range (ATR) indicator to develop an ATR grid trading strategy. I'll discuss this in detail later.

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Defining the Forex Grid Trading Strategy

The Forex grid trading strategy is a technique that seeks to make a profit on the natural movement of the market by positioning buy stop orders and sell stop orders at different intervals above and below a set price. Because levels are set on both sides, this is sometimes referred to as a double grid trading strategy.

You can create your grid to profit from ranges or trends. For example, a trader can place buy orders at each 15 pip interval above the set price, while putting sell orders at each 15 pip interval below this price as well. This will take advantage of trends. The chart below gives a visualization of such a grid.

With-the-trend Grid

grid trading scenario 1

They may also place sell orders above the set price and buy orders below it, which would take advantage of a market that is trading within a range (moving up and down between a high and low price).

The principle behind grid trading with the trend is that if the market price consistently moves in one direction, your position to capitalize on gets larger. As the price rises, the grid triggers more buy orders causing your position to grow. Your position will grow and becomes more profitable if the price continues to run in this direction.

However, this results in a dilemma for traders. Eventually, the trader must decide when to close the grid, exit all of their open trades, and collect their profits. At some point, the price could reverse direction and your profits can disappear. Your losses will be controlled by your sell orders, which are equally spaced apart. However, by the time the price reaches those orders and they are triggered, your position may have already gone from a profit to a loss.

When should you “close” the grid?

When trading with a grid trading Forex strategy, 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.

In a Trend Market

With a grid trading Forex strategy, 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.

To protect against a reversal, traders often limit their grid to a specific number of orders. For example, five. They might place five buy orders above their set price. If the price then passes through each of the five buy orders, they exit their trade with profit. Traders may exit their positions all at once or create a sell grid that begins at a target level.

In another approach using the grid trading Forex strategy, 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.

In grid trading, 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.

In a Range

If the price action is volatile and trading in a range, it may trigger both sell orders below your set price and buy orders above it, which would result in a loss. In this case, the trend strategy above fails. A price bouncing up and down usually won't produce profits with this strategy.

In volatile or range markets, a strategy for trading against the trend is usually more effective. For example, a trader may place buy orders at common intervals below their set price, and sell orders at common intervals above it. As the price drops, the trader goes long. As the price increases, the sell orders are activated to minimize the long position to go short. The trader can profit if the price continues to shift up and down in a sideways range, triggering sell and buy orders.

The main problem with this type of grid is that your risk isn't controlled. The price may trigger some positions without hitting your take-profit and then retreat in the opposite direction. This, in turn, leaves one position open and accumulates loss.

A trader can end up with a losing position that grows and grows if the price continues moving in one direction instead of oscillating in a range. The trader has to set a stop loss, since they won't want to continue holding a losing position that is growing indefinitely.

Is a Grid a Hedged System?

A grid may remove 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 manual grid trading strategy can be considered a hedged system - because it entails a system of loss protection. The idea is that some of the losing trades might be offset by profitable trades.

In an ideal situation, the entire system of trades becomes 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.

Implementing the Forex Grid System

Here's an example of how to construct a manual grid trading strategy. As I mentioned above, this can also be considered a double grid trading strategy.

I'll now explain how to set up a grid to profit from a trending market. There are many steps to follow:

  • Pick an interval: 5, 10, 50, or 100 pips, for example.
  • Choose a starting price for your grid.
  • Decide whether you need to set up a with-the-trend grid or an against-the-trend grid.

If the market looks like it will move in a trend, a with-the-trend grid may have a starting point of 1.1660 with 10-pip intervals. A trader may set buy orders at 1.1670, 1.1680, 1.1690, 1.1700, and 1.1710. Sell orders would be set at 1.1650, 1.1640, 1.1630, 1.1620, and 1.1610.

With this strategy, the trader will need to exit their position when it has become profitable to lock in their profits. If the market moves in the direction they anticipated, their position grows and they exit on time, collecting their profits, this is a successful grid trading strategy.

Assume you opt for an against-the-trend grid. You also choose 1.1660 for a starting point with a 10-pip interval. You set buy orders at 1.1650, 1.1640, 1.1630, 1.1620, and 1.1610. You set sell orders at 1.1670, 1.1680, 1.1690, 1.1700, and 1.1710. Such a strategy will secure profits when both the sell and buy orders get activated. However, this strategy needs a stop loss to protect yourself if the price travels in one direction.

If the price remains volatile, triggering both buy and sell orders without trending in one direction and triggering the stop loss, the trader will be able to exit their position and collect their profits. This is a successful grid trading strategy.

Grid Trading EURUSD

Imagine a day trader sees that EURUSD is in a range between 1.1500 and 1.1600 and the current price is near 1.1550, so they choose a 10-pip interval with an against-the-trend grid to capitalize on this range.

They place sell orders at 1.560, 1.1570, 1.1580, 1.1590, 1.1600, and 1.1610, and a stop loss at 1.1630. This ensures there is a cap on their risk. Their risk will be 270 pips if each sell order is triggered, but none of the buy orders trigger and it reaches the stop loss.

They then set buy orders at 1.1540, 1.1530, 1.1520, 1.1510, 1.1500, 1.1490 and a stop loss at 1.1470. The risk is also 270 pips if each buy order is triggered but none of the sell orders trigger and it reaches the stop loss.

This trader will be anticipating the price to move lower and higher within the 1.1610 and 1.1490 range. They're also anticipating that the price won't move far outside this range. If it does, they'll have to exit their position with a loss to minimize their risk.

The unpredictability of the market 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.

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 before risking your money, you can sign up for a FREE demo account with Admirals. Trade with real market data, test stop limits in different scenarios and try out different trading strategies to see if they work before trading your money on the markets. Click the banner below to get started:

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Other Grid Trading Strategies

You may be able to incorporate other trading strategies into your manual grid trading strategy to strengthen it. For example, you could use the Average True Range (ATR) indicator to help you measure price range volatility in the market before you set up your grid - an ATR grid trading strategy.

Another strategy uses Gann lines. These are intersecting lines blanketed across a trading chart. They aim to map potential upward or downward price trends. Some lines represent the direction tendency of the price, while others indicate lines of support and resistance.

Understanding which direction the price may or may not trend can provide you with more insight when developing your trading strategy. This can be referred to as a Gann grid trading strategy.

Is the Grid System for Me?

I'll leave you with some of the advantages and disadvantages of the grid trading system, to help you better understand what it entails and whether or not it's for you.

Advantages

  • 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.

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, it's possible it could 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 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.

Disadvantages

  • 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. Some traders use a grid trading strategy 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, while automated trading may seem attractive, it isn't always as profitable as it sounds. It 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 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 Admirals

If you're ready to try out the grid trading strategy on the live markets, you can open a live trading account. Admirals offers professional traders the ability to trade 40+ currency CFDs, with access to CFDs on a range of Forex majors, Forex minors, and exotic currency pairs. To open your live account, click the banner below!

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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.

 

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