Forex grid trading does not try to predict market direction like traditional trading strategies do. Instead, it is a system of placing pending buy and sell orders around the current market price to take advantage of continuous price movements. Forex grid trading is easy to learn, and the strategy can be active in any market.
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But is it profitable, and what are the risks? Let’s start by looking at how Forex grid trading works.
Understanding Forex Grid Trading
Forex grid trading places a “grid” of buy and sell orders below and above a pre-determined price level:
In the above chart example, I used the chart’s current EURUSD price of 1.03495 to place gride lines at 50-pip increments below and above the current price.
But wait, which orders on the grid are buy orders versus sell orders? The placement of buy and sell orders will depend on the type of Forex grid strategy I use and whether I am looking to capture market trends or trading ranges.
Let’s now examine a couple of specific grid trading strategies.
Grid Trading Strategies
Forex Grid Strategies fall into two categories: range-following and trend-following. Let’s begin by looking at a simple range-following strategy.
A Range-following Forex Grid Trading Strategy
Step 1: Identify a trading range with clear horizontal support and resistance boundaries and where you expect the price to continue trading in the range. If the trading range is unclear, wait until a clearer range setup appears.
Step 2: Place sell-limit orders in equal increments from near the midpoint of the trading range to the top of the range. For example, if I want five sell orders and the range is 200 pips, I will place sell orders in 20-pip increments for the top half of the range.
Step 3: Place buy-limit orders in equal increments from below the midpoint of the trading range to the bottom of the range. Using the same trading range of 200 pips in Step 2, I will place five buy-limit orders in 20-pip increments for the bottom half of the range.
Step 4: Set a take-profit level at the midpoint of the range for the buy and sell orders.
Step 5: Place stop losses on either side of the range. I would place them at levels where I feel the range would be invalid if the price reached there.
As the price moves around the range, the different orders will trigger with the expectation that the price will return to the midpoint of the range. If the price fluctuates around the midpoint, I will collect regular profits from the nearby buy and sell orders. There will be more open orders as the price moves further from the midpoint (and greater negative equity), but then there will be larger profits when the price returns to the midpoint.
A Trend-following Forex Grid Trading Strategy
I shall cover two versions of the trend-following strategy.
Version 1
This executes trades as the price moves in the direction of the trend.
Step 1: Identify a trend or an area of consolidation where you believe a new trend will form. In the diagram above, I show a trend, which pauses in a consolidation pattern (triangle continuation pattern).
Step 2: Set up buy orders above the current price in equal increments.
Step 3: Set up sell orders below the current price in equal increments.
Step 4: Place a stop loss at a point where the trend becomes invalid. In the above diagram, I have placed it at the breakout level.
Step 5: Place a take profit at a level where you wish to have no more entries but want to take profits on all the previous open orders.
This version of the trend-following grid trading strategy accumulates more open positions as the trend unfolds (rather than placing a single entry near the beginning of the trend as a traditional strategy would do).
Version 2
This is the opposite of Version 1. It relies on capturing pullbacks from a prevailing trend rather than entering in the direction of the trend.
Step 1: Identify a trend which you believe will continue.
Step 2: For an uptrend, set buy limit orders below the current price in equal increments. For a downtrend, set sell limit orders above the current price.
Step 3: Set a take-profit order or multiple take-profit orders to scale out of the trade on the other side of the entry orders.
Step 4: Place a stop loss at a point where the trend becomes invalid.
Determining Grid Size and Spacing
The size of the trading range or trend will determine the grid size. For example, if I am grid trading a 200-pip range, then the size of my grid will be 200 pips. If I am grid trading on a trend that I believe has another 250 pips to travel, I will set up a 250-pip grid. Some Forex pairs and timeframes will show small ranges and trends, and others will show larger ranges and trends. There’s no set rule for the grid size.
The larger the spacing between the grid levels, the fewer open trades I need to manage, but the strategy will capture fewer fluctuations. I have used equally spaced grid levels in the above grid trading strategies. However, I can adjust the spacing of the grids and even the order sizes. For example, I can place my grids around minor support and resistance levels within a range.
Balancing Profit and Risk
Forex grid trading is an aggressive strategy because it creates multiple open trades. If the market moves in my predicted direction, I will profit regularly because the grid setup collects regular profits from multiple orders. However, if the price moves against me, for example, breaks out of a trading range that my grid covered, I will lose on multiple open positions.
To effectively balance profit and risk, always know the maximum loss on a grid compared to the maximum profit. Ideally, I do not want the maximum loss to be much larger than the maximum profit. Then, test the strategy with small lot sizes or a demo account to see how often you reach the maximum loss and how long it takes to recover it.
Grid Market Analysis
There are several elements to grid market analysis:
- Technical Analysis: Identifying a stable range or trend is more than eighty percent of success in grid market analysis. If the price breaks out from a range or the trend reverses unexpectedly, I will lose money on my grid trading. The success of grid trading is knowing the correct market conditions. Grid trading is not a magic pill that can work if the price does not go in my favor.
- Selecting the currency pair. Conventional wisdom for Forex grid trading says that liquid major pairs, such as EURUSD, which move in stable ebbs and flows, are generally better than exotic currencies, which can jump erratically. However, more importantly, the currency pair should show a stable trend or trading range without many price gaps, and I’ve seen many exotic pairs do that.
- Stop-loss placement and risk management. Every grid trader should use a stop-loss and measure the total exposure if the trade goes against them. I should reduce my lot sizes if the total potential loss is too high.
Automated Grid Trading Bots
Grid trading strategies can be more complex, such as dynamically moving grid spacing and custom lot sizes at different levels. Also, there’s a lot of manual order entry for grid trading. Many programmers have created grid trading bots that are available to purchase. Some even identify market conditions, such as trends versus trading ranges, to have a fully automated grid trading system. If I were grid trading, I would use an automated trading bot to assist me, whether partially or fully automated, because it would help significantly speed up the testing and execution of the strategies.
Grid Trading Pros and Cons
Pros
- Forex grid trading systemizes capitalizing on ranges and trading to help take the guesswork out of entries and exits.
- Grid trading can profit from the frequent minor moves near the center of trading ranges.
- I can choose trend-following grid strategies to capitalize on pullbacks or build positions as the trend moves in my favor.
- Many grid trading bots help identify market conditions and can turn grid trading into a fully automated strategy.
Cons
- People often think of grid trading as a complete trading system. However, it rests on a trader's ability to correctly identify trading ranges or trends. The grid trading strategy then capitalizes on this analysis.
- Grid trading results in multiple open positions, which means keeping low position sizes to avoid high exposure if the entire trade goes against me.
- Maximum losses often equal maximum profits in a grid trading setup, meaning the strategy does not have high reward/risk ratios.
Bottom Line
Forex grid trading is a system of placing buy and sell orders in a “grid” to capitalize on trading ranges and trends. It relies on correctly identifying the market environment, i.e., trending or ranging, before a trader applies the correct type of grid trading strategy. Grid trading helps take the guesswork out of order placement. The strategy does not have high reward/risk ratios but can collect more profitable trades in areas that traditional trading would miss. Consider using an automated grid trading bot that helps streamline the process and allows added features such as dynamic grid spacing and lot sizes.
