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Forex Grid Trading
Written by: PaxForex analytics dept - Thursday, 26 May 2016 0 comments
Forex trading that attempts to take advantage of the natural back and fourth motion of the market by placing orders both above and below the current market price and catching profits as the market moves is called a grid trading. The appeal of this type of trading is that the model requires almost no forecasting of the market direction. This benefit of removing the variable of price forecasting. However, it comes at a cost of complicated money management, trading psychology and grid visualization issues you will need to deal with.
The basic idea of grid trading is very straightforward. Instead of placing one trade, you place multiple trades forming a grid pattern. Usually these are entered as “stop” or “limit” orders around the current price level – but not always. Grid trading is a play on market volatility. There are two reasons why it is favored by forex traders. The first one is that it doesn’t require you to have a definitive prediction on the market direction. The second one is that it works well in volatile markets, where there isn’t a clear trend – these conditions are very common in the currency markets.
There is nothing mysterious about grid trading, there is no big secret behind the scenes. It is really just placing a series of trades as the price action develops. Executing long (buy) orders creates a long grid, a short (sell) orders creates a short grid, and both shorts and longs - a hedged (classic) grid. Of course, to be consistently profitable with grid trading you need to select proper settings for your grid according to the market you are trading. You need to have a solid risk management, well thought money management and so on. All the little things that turn a trading technique into a successful profitable trading system.
Grid Trading is most popular in the forex market- in fact you can often read about it being referred to us as Forex Grid Trading. However, there is no limitation on the type of market you can use it with. It can be successfully traded on virtually any financial instrument out there - for example it also performs very well on futures and indices. In other words grid trading is a truly versatile system.
Forex Grid Trading Strategies
When so many experts recommend trading ways and money markets only for people with good financial skill, grid trading proves that everyone can join in this forex trading market. Because the work is efficient and effective with easy access to understand, you don’t need to predict the trade trends or worry about specific risks. You just need to prepare some smart strategies and movements about this grid trading style for your best money investment.
However, you should know that you need to have the basic knowledge of forex as well as some experience when it comes to analyzing the charts and understanding how they actually work. Diving straight into forex grid system without any previous comprehension is not recommended. To put it as simply as possible, forex grid strategy focuses on a certain trend and its
movement, whether it is upward or downward. The main goal is to closely follow these fluctuations over a certain period of time and a trader should aim to complete buy or sell orders when a trend is around ten pips away from the current price of a chosen trend.
Probably the most beneficial part of the grid forex strategy is the fact that you don’t have to predict a trend’s direction since you are trading so closely to the trend’s current price. There is no need for you to dwell into a thorough market analysis and trying the guess which factors might influence a trend and in which way. On the other hand, you will be required to have several positions opened at the same time if you want to profit from this type of trading strategy.
This might not be suitable for all traders since it might be a bit too risky to keep a number of open positions. But managing your time properly and identifying the right rhythm of opening and closing positions can help you out with this issue. Also, placing a stop loss order within forex grid strategy is sometimes overlooked and traders seem to completely forget about it. Stopnloss orders can come in handy and you should definitely spend some time placing them correctly in order to protect your funds.
What you need to understand is that in order to see the results of forex grid strategy, you need to give it some time. Grid trading forex requires your commitment and persistence. The first results might not be visible after just a week of applying this type of strategy, but they will be there after few weeks or months. Plenty of traders give up altogether on forex grid strategy very quickly, without giving it a proper chance. You need to keep your head in the game and be aware of the volatility of the market.
Grid Trading Advantages
Systematic way to make profits under typical market conditions
It doesn’t rely on strong trends. Grid trading can generate profits in trendless, predominantly sideways markets. These conditions are very common in forex.
Using multiple entry/exit levels means you’re less likely to be “taken out” by price spikes, market noise or abnormally wide spreads. Multiple entry points allow you to benefit from cost averaging.
It’s doesn’t rely on a single “absolute view” of the market direction.
It’s relatively easy to code software (e.g. an expert advisor) to execute and manage the order flow.
Grid Trading Disadvantages
In order to realize profits quickly, traders are often tempted to cash in their winners too early. But losing trades are erroneously left to ride out with deep drawdown until retracement occurs.
Some or all of the positions may end up in negative territory for a long time, so locking up capital.
In fast moving markets your trade orders may execute far away from your desired grid levels. This can leave you un-hedged.
Technical issues: For the grid system to work properly, it’s critically important that your orders, stops and limits execute correctly. If some of your trade orders fail you can find yourself sitting on accumulating losses. This can be caused by a number of problems from glitches in software to your broker’s technical issues.