When new traders join the foreign exchange, they believe they can make a major profit in a relatively easy and quick way. Although they all know that Forex is associated with risks and a strong possibility of losses, they still hope that there is one universal recipe for absolute success. While there is no such thing as a 100% winning trading method, there is a bunch of strategies that can significantly maximize the profit and minimize the risks. Some find that the Forex grid system strategy works the best for them. The current article is dedicated exclusively to this strategy. Below, we will explain it and tell a bit more about how it works.
The grid Forex strategy is different from the majority of the existing strategies — it was originally developed by currency traders, not borrowed from other areas of trading. This strategy addresses price fluctuations within a particular trend. Any price trend presumes price movements both ways (upwards and downwards), which are a part of this trend. While fluctuations are insignificant — usually up to a dozen pips — traders make use of them to generate some profit. Price fluctuations occur with certain intervals — individually for each currency — and determining them correctly will allow the traders automate their strategy.
Trader who use the grid strategy will often keep several positions open simultaneously. The orders will be closed not all at the same time and not one by one, but when the time comes for each individually. In grid trading, traders simply preset their orders to a few pips higher or lower than the current price, as the price should return to the original level or continue to move along with the trend.
In grid trading strategy, it is enough to correctly estimate the intervals. You don't need to predict the exact future price here; the intervals are what matters the most. Still, the system has a significant shortcoming: the necessity to keep a number of orders opened. This, especially when combined with higher leverage ratios, is the main reason for major financial risks.
Let us not concentrate on the theoretical aspects of the grid FX trading anymore. It is an exciting method, but its main advantages come from its practical side. So, let's move on and look at how this method can be properly used in real-life trading.
The most important step in starting with FX grid trading is to decide on the instruments that will be used in your trading. First of all, we must warn you that you should avoid using many instruments at once, as you might find it hard to make this number of investments at the same time. Still, you might be well-financed to deal with multiple currency pairs; in this case, it might help you to get the most out of this strategy. Nevertheless, it's better to pick the currencies with different volatility, so that the one remains quite stable, while the other might get occasionally influenced by certain political and economic events.
When choosing the currency, you should also consider its normal spread (the difference between the buy and sell prices), as you will be setting the intervals based on this information. Grid traders often choose low-spread currencies with high volatility, such as USD/JPY, EUR/USD, or EUR/JPY. The best advice would be to choose the pair whose price behavior is familiar to you.
Your second step, after deciding on the currency pair/trading instrument, would be to determine your grid size. In the grid strategy, Forex traders mean by this a number of trades they are going to execute. We have mentioned it earlier that you would need several orders opened at the same time. The truth is, almost every trader who has tried this strategy would advise against grids with less than 10 orders. Grids with 10 to 15 trades would be fine for long-term traders, while the optimal size for short-term ones would be 20 to 30 trades per grid.
The essential part of this strategy's setup is choosing the right intervals. To do this properly, you should look for the fluctuation points in your currency pairs. Here, the spread plays a significant role too: the bigger the difference between the buy and sell price, the bigger intervals you should use. Normally, each interval should be about 10-20 pips. It means that for a 20- to 30-order grid, you'll have your entire grid 200 to 600 pips big.
The interval size is essential when it comes to building grids in the Forex grid system. You should treat it with caution and attention. If you are trading short-term, then the described grid would be just fine; however, for long-term traders, it should be even bigger.
Whatever strategy you are choosing, you should always think about how much you want to earn on trading and how much you are ready to risk. When we are talking about the risks and rewards in relation to trading strategies, we often mean using stop-losses and take-profits. Since you will have multiple orders opened in your Forex grid, you should think about setting the SL (stop-loss) and TP (take-profit) points beforehand. If your SL:TP ratio is 1:1, then you risk to fail at grid trading altogether, as the spread costs will make you lose your capital pretty soon; your chances of getting a substantial profit will be not that big.
Estimating the correlation of risks and rewards will help you to build your Forex grid strategy correctly, so that your spendings and earnings will be under your control. We wouldn't recommend you putting more than 1-2% of the total trading capital at risk per single trade. You should remember that you will risk even more with a number of opened positions, which is why it's recommended to set the max risk to 0.5-1% for each order.
When you place your TP and SL, bear in mind that the price move will less likely reach your TP point than the SL one. Therefore, keep the stop-losses set at a lower level than take-profits. In fact, a TP point should exceed your SL one by a number of times, between 1.5 and 4. If you go with a stop-loss set at 10 pips, then your take-profits would be set at up to 40 pips. This way, you set your risks to a minimum, while maximize the chances of getting a reward. If your take-profit point is executed, you'll get a fair compensation for any possible losses.
To plot your Forex grid strategy most effectively, you should consider also the swaps and the spread. If you have, say, no commission on your EUR/USD pair where the spread is just 1 pip, it would be better to set your stop-loss to lower number of pips than you would have with another pair. If your SL is normally 10 pips, in this case it can be 9, for example. This would be a slightly more efficient way to minimize the risks.
So, we have outlined the basic information about the grid trading Forex strategy, starting from its definition and following through the main points everyone should consider when using it. Also, we have provided you with some practical tips on how to manage your risks and maximize the possible gains with the help of SL and TP levels. Now, it might be the right time for you to create a demo account with a broker of your choice and set up your grid strategy.
When setting up the grid system and placing multiple orders, remember to keep your margin low to reduce any possible unforeseen expenses. Also keep in mind that every strategy needs a thorough backtesting and real-life testing. Make sure that you are comfortable with grid trading, try it out for some time: a few month to a year. In case you feel that you want to try another strategy, you can always find some nice suggestions with us.