A forex grid strategy is a type of trading strategy that uses two or more orders concurrently instead of only one. It involves placing orders at a certain distance above and below a proposed price, creating something resembling a grid. This style of trading is a good way of capitalizing on a detected trend, and it offers traders a means to increasing their deposits considerably. Bear in mind that, owing to the difficulty of finding the right balance between profits and stop-level orders (i.e., finding the right interval distance between the orders placed), it is tricky to implement a grid strategy that is profitable.
The basic idea of grid trading is very direct. Instead of placing one trade, we place multiple trades forming a grid pattern. It is highly profitable and does not depend on direction, profits from volatility instead; it uses the inherent strident nature of the market. It also requires no market timing or complicated analysis, but rather, the ability to forecast where the market won't go in the long term and a good understanding of equity, exposure and leverage.It has a set of unique features:
• You can decide which direction to trade: either long, short or both
• Grids can be optionally restarted at certain profit levels.
• It can be closed or paused at the trader's discretion.
• It does not commerce open ended grids, the exposure is restrained.
• No pending orders are placed: only market orders.
• Risk and exposure are pre-calculated and displayed
Grid trading is a play on market volatility. There are two reasons why it is favored by forex traders. The first is that it doesn’t require you to have a definitive prediction on the market direction and it is very easy to set up and supervise.
It uses the following methodology; you start by buying and selling a currency. When the price moves a set distance, that is the grid leg, you cash in the positive leg, leave the negative leg and buy and sell again. Sooner or later the system goes positive and then you cash in when it is positive after it reaches the end of a particular leg.
Money is made when the price retraces at various levels. The grid system is also based on the nature of the market to sideways 80% of the time and to trend 20% of the time.
The disadvantage is that, what if the price does not backtrack and continues to trend, the Grid system cannot make money in a trending market. One has to realize that.
Therefore, the strategy is to minimize damage during these periods by using a combination of strategies. It have been discovered that the biggest mistake made by traders is that they select a very small grid leg sizes e.g. 20 to 30 pips. This can be disastrous. The trick is to use big leg sizes between 150 and 300 pips. What this does is that it oftentimes turns a trending phase into movement in a sideways market.
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