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I’ll explain this in more detail below, but that’s the basic idea. What is grid trading and how does it work? Grid trading is a play on market volatility. There are two reasons why it’s favored by forex traders. In this article I’ll give some practical examples of grid trading setups, and explain under what conditions grids work as well as their weaknesses. You can download my Excel spreadsheet below to develop your own grid trading scenarios. The basic idea is that any losing trades can be offset by the profitable ones.
Ideally, at some point the entire system of trades becomes positive. We would then close out any remaining positions and the profit is realized. With this grid strategy the ideal scenario is that the price moves back and forth across one side of the grid. In doing so it executes as many of the orders and passes as many of the take profit levels on one half as possible. However, you can still be profitable in a trending market.
I’ll get onto that in a minute. The hedged grid is a market neutral strategy. The profit will be exactly the same whether the market rises or falls. What’s appealing with this style of trading is that you don’t need to predict either a bearish or bullish trend. However if your set up is right, you can still profit in either a bearish or bullish rally. Let’s have a look at a basic grid configuration. EURUSD Example Say we want to set up a grid on EURUSD and the price is currently at 1.
15 pips and 4 levels above and below the start. There’s no hard and fast rules here. You are also free to increase or decrease the number of trades as required, and change the interval and take profits to anything you like. But remember increasing the leg size and adding more levels will increase the maximum loss.
The buy-stop orders are triggered if the price moves above the entry level, while the sell-stop orders are triggered if the price moves below the entry level. So we always trade into the trend with this grid strategy. As the table shows, the trade pairs in the grid hedge each other. L is fixed at that point. Running the Grid If the price were to move in a straight line up 60 pips it would execute all of the buy orders, and none of the sell orders. Likewise, if the price moved straight down 60 pips, we’d have all of the sell orders execute and we’d again end up with a profit of 90 pips. What would more likely happen though is that the price will swing up and down causing some of our buy and sell orders to execute at different points.
Say for example the price dips below 1. 3500 and the first one of our sell orders executes. Now what happens if we get a reversal and a bullish rally? Let’s say the price increases enough to hit the level for the last buy order in the grid.