Grid trading is one of those lesser-known trading strategies that can surprise both novice and seasoned traders. It focuses on buying assets cheap and selling them expensive regardless of the general direction of the market. In other words, it’s a way to take advantage of volatilities.
But what is grid trading in more detail? Is it worth your time and effort? Most importantly, how do you set a grid trading strategy? In this blog post, you’ll learn what this strategy is, its 2 types, and how you can make money from it.
Stay tuned to get all the info!
What Is Grid Trading?
Let’s start off by defining trading grids. Grids are basically pre-defined price levels at which buy and sell orders are automatically executed. Together, these grid lines create a net to capture smaller profits that accumulate over the time.
As you may have thought, the concept of “small profits accumulating” could be reminiscent of scalping, another popular trading strategy. But grid trading works slightly differently. The concept behind the strategy is simple and straightforward. You buy when the price is low and sell when it rises.
In essence, grid trading doesn’t care for the direction in which the market is headed. It just aims to profit from the small moves that occur when prices oscillate. The strategy comprises a set of individual trades, meaning there are no take-profit orders set on individual transactions, rather, just stacking profits continuously.
Each trading grid has an upper boundary (the highest price where sell orders are placed), a lower boundary (the lowest price where buy orders are placed), and a few grid lines (equally or variably spaced price levels between boundaries).
Grid trading relies on mean reversion, which means the price will bounce back to an average level while it’s oscillating. Because of its nature, grid trading is considered to work like a mechanical trading system, where traders won’t be required to go through continuous decisions.
Types of Grid Trading Strategies
There are a few ways you can go about your grid trading practices. These ways mostly depend on which type of trading grid you prefer to use. So, here are 2 grid trading strategies for you.
1- Fixed Grid Trading
When you’re using a fixed grid, you’re basically dealing with static, unchanging price intervals for buy or sell orders. This means that orders are placed at fixed arithmetic or percentage intervals. There are no adjustments, regardless of market volatility, trend strength, and direction.
For example, if you’re trading stocks, you could set a buy/sell order for every $10 that the price moves. On the other hand, for a forex grid trading strategy, you’ll set your orders every 0.5% of price movement, and so on.
This strategy is simple to implement, as you won’t be stuck with any complex calculations. Also, you can easily backtest the strategy, as it stems from consistent rules for historical analysis. All in all, it’s a low-maintenance, set-and-forget strategy perfect for sideways markets.
On the flip side, fixed grid trading strategies have a tendency to fail in strong trends, as buy and sell orders get “run over” in sustained moves. They are also inefficient in markets that are too volatile because spacing may be too tight/wide during price spikes. Lastly, if the price leaves your predetermined range, you’ll have to manually reset the grid lines.
Overall, it could be said that the fixed grid trading strategy is a good match for beginners who are interested in stable, range-bound assets (e.g., forex pairs like EUR/CHF).
2- Dynamic Grid Trading
You could also decide to use dynamic grids, which adjust grid spacing automatically based on market volatility. In other words, this strategy widens spacing during high volatility (e.g., news events) and narrows it during low volatility (like quiet markets).
Because this strategy is more on the automated side, it uses indicators like ATR (Average True Range), Bollinger Bands, or standard deviation. For example, if ATR is $50, then your spacing would be 1 x ATR ($50).
The most obvious advantage of dynamic grid trading is its adaptability to market conditions. This helps you avoid over-trading in choppy markets. Dynamic grids also reduce whipsaw risk by using wider spacings in volatile markets. In short, they make it possible to be more efficient with your capital use without setting extra, redundant orders.
Still, if the strategy were that perfect, everybody would just use it. The fact of the matter is that dynamic grid trading can be complex to optimize. It requires tuning for each asset, and it may also react too slowly to sudden volatility shifts. Finally, if you’re planning on using a forex grid trading bot, you should know that this strategy is not ideal for simple bots.
The ideal match for this type of grid trading strategy would be an advanced trader who’s comfortable with coding, automated trading, and optimization. Additionally, it works best in high-volatility assets like crypto and commodities.
Setting Up a Grid Trading Strategy
Now, it’s time for you to dip your toes in the water and get more hands-on experience with the grid trading strategy. The best course of action would be to find yourself a reliable broker and follow the steps below:
- Step 1: Choose the Right Market: The very first thing you need to do is pick what type of grid trading strategy you want to use and pick a market accordingly. For example, forex is a good match for fixed grid traders, albeit in assets that have enough liquidity and stability. At the same time, the turbulent atmosphere of the crypto market makes it a better match for dynamic grid traders.
- Step 2: Set Up Your Grid: The next step is to set up your trading grid. Based on the market and asset you’ve chosen, you should determine a range and start setting grid lines. This can be achieved by setting lines at fixed percentages of price movement within the range. Be careful to start small, though (e.g., 5-10 orders in total), as adding more could enhance trading risks.
- Step 3: Manage Risk: The risk management techniques for this strategy are not much different than those of other approaches. First off, never risk more than 1-2% of your account per trade. Avoid “Martingale,” AKA doubling down after losses. Last but not least, don’t forget to set a stop-loss to help you exit if the price leaves your grid range.
- Step 4: Test Before Going Live: We suggest you open a demo account before taking part in any real trades. This allows you to explore the strategy and see whether or not it works for you in a safe, risk-free environment. You can also backtest (check the past performance) the strategy using tools like TradingView or Forex Tester.
Example Scenario
Let’s say you’re trading Bitcoin (BTC) against the US dollar (USD), and the current price is $50,000. You decide to set up a grid trade, a strategy that automatically buys low and sells high within a set range. You place buy orders below the current price at $49,000, $48,000, and $47,000, each set to purchase 0.1 BTC if the price drops to those levels. On the other hand, you place sell orders above the current price at $51,000, $52,000, and $53,000, each set to sell 0.1 BTC if the price rises.
Now, imagine the price falls to $47,000, triggering all three buy orders. So you’ve bought 0.3 BTC at an average of $48,000. Then, the market rebounds to $52,000, triggering two sell orders (at $51,000 and $52,000), so you’ve sold 0.2 BTC at an average of $51,500. Your profit comes from the difference between what you bought and sold: ($51,500 – $48,000) × 0.2 BTC = $700. Not bad for riding the market’s ups and downs! This is the basic idea behind grid trading, that is, capitalizing on volatility without predicting the direction.
Conclusion
At its core, grid trading is a strategy that focuses on earning smaller profits from buying at low price levels and selling at high prices. It works by setting a range, in which the market oscillates, and establishing a series of grid lines, at which buy and sell orders are placed.
There are two types of grid trading strategies: fixed and dynamic grid trading. While fixed grid trading is a better match for beginners who prefer low-volatility markets, dynamic grid trading challenges advanced traders who know their way around more complex practices.
To set a good grid trading strategy, you’ll need to first pick your market of choice. Then, you can set up your grid and let risk intelligence protect your trades while they’re being executed. You can, and should, also test the strategy in safer environments (i.e., demo accounts and backtesting).
Knowing all that, it’s now your turn to get your hands dirty and test the strategy for yourself. Open your ITBFX demo account now and start testing your grid now!
Grid trading can be beginner-friendly if you start small, use tight risk management (1-2% per trade), and avoid volatile assets. However, strong trends can wipe out profits fast, so always use stop-losses.
You can start with as little as $100–$500, but more capital helps absorb volatility. Smaller accounts should use wider spacing to avoid overexposure.
Grid trading struggles in strong trends, as prices may blast past your orders. It works best in choppy, sideways markets where prices bounce between levels repeatedly.
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