Grid Trading

What Is Grid Trading?

Grid trading is when orders are placed above and below a set price, creating a grid of orders at incrementally increasing and decreasing prices. Grid trading is most commonly associated with the foreign exchange market. Overall the technique seeks to capitalize on normal price volatility in an asset by placing buy and sell orders at certain regular intervals above and below a predefined base price.

For example, a forex trader could put buy orders every 15 pips above a set price, while also putting sell orders every 15 pips below that price. This takes advantages of trends. They could also place buy orders below a set price, and sell orders above. This takes advantages of ranging conditions.

Understanding Grid Trading

An advantage of grid trading is that it requires little forecasting of market direction and can be easily automated. Major drawbacks, however, are the possibility of incurring large losses if stop-loss limits are not adhered to and the complexity associated with running and/or closing multiple positions in a large grid.

The idea behind with-the-trend grid trading is that if the price moves in a sustained direction the position gets bigger to capitalize on it. As the price moves up, more buy orders are triggered resulting in a bigger position. The position gets bigger and more profitable the further the price runs in that direction.

This leads to a dilemma, though. Ultimately the trader must determine when to end the grid, exit the trades, and realize the profits. Otherwise, the price could reverse and those profits will disappear. While losses are controlled by the sell orders, also equally spaced, by the time those orders are reached the position could have gone from profitable to losing money.

For this reason, traders typically limit their grid to a certain number of orders, such as five. For example, they place five buy orders above a set price. If the price runs through all the buy orders they exit the trade with a profit. This could be done all at once or via a sell grid starting a target level.

If the price action is choppy it could trigger buy orders above the set price and sell orders below the set price, resulting in a loss. This is where the with-the-trend grid falters. Ultimately, the strategy is most profitable if the price runs in a sustained direction. The price oscillating back and forth typically doesn't produce good results.

In oscillating or ranging markets, against-the-trend grid trading tends to be more effective. For example, the trader places buy orders at regular intervals below a set price, and places sell orders at regular intervals above the set price. As the price falls, the trader gets long. As the price rises the sell orders are triggered to reduce the long position and potentially get short. The trader profits as long as the price continues to oscillate sideways, triggering both and sell orders.

The problem with the against-the-trend grid is that the risk is not controlled. The trader could end up accumulating a larger and larger losing position if the price keeps running in one direction instead of ranging. Ultimately, the trader must set a stop loss level, as they can't continue to hold a losing (let alone make bigger) position indefinitely.

Grid Trading Construction

To construct a grid there are several steps to follow.

In a with-the-trend grid, assume a trader chooses a starting point of 1.1550 and a 10 pip interval. Place buy orders at 1.1560, 1.1570, 1.1580, 1.1590, and 1.1600. Place sell orders at 1.1540, 1.1530, 1.1520, 1.1510, and 1.1500. This strategy requires an exit when things are going well in order to lock in profits.

Assume the trader opts to use an against-the-trend grid. They also choose 1.1550 as the starting point and a 10 pip interval. They place buy orders at 1.1540, 1.1530, 1.1520, 1.1510, and 1.1500. They place sell orders at 1.1560, 1.1570, 1.1580, 1.1590, and 1.1600. This strategy will lock in profits as both buy and sell orders are triggered, but it requires a stop loss if the price moves in one direction.

Example of Grid Trading in the EURUSD

Assume a day trader sees that the EURUSD is ranging between 1.1400 and 1.1500. The price is currently near 1.1450, so the trader opts to use a 10 pip interval against-the-trend grid to potentially capitalize on the range.

The trader places a sell order at 1.1460, 1.1470, 1.1480, 1.1490, 1.1500, and 1.1510. A stop loss is placed at 1.1530. This assures there is a cap to the risk. The risk is 270 pips if all the sell orders are triggered, no grid buy orders are triggered, and the stop loss is reached.

They also place buy orders at 1.1440, 1.1430, 1.1420, 1.1410, 1.1400, and 1.1390. They place a stop loss at 1.1370. The risk is 270 pips if all the buy orders are triggered, no grid sell orders are triggered, and the stop loss is reached.

The trader is hoping the price will move higher and lower, or lower and higher within the range of 1.1510 and 1.1390. Although they are also hoping that the price doesn't move too far outside that range, otherwise they will be forced to exit with a loss in order to control their risk.