What is Forex Grid Trading and How Does it work?
You might have heard traders talk about a Forex grid trading strategy. This is used by traders looking for a strategy that can be easily understood and implemented without much effort, whilst gaining profits quickly. So, what is Forex grid trading, is it profitable, and how do you use it?
Definition of Forex grid trading
The grid was developed by FX traders, which differentiates it from most strategies which developed from stocks, commodities or other trading instruments. It is a simple strategy that assumes price movements over a certain trend, whether upwards or downwards. The focus is on the fluctuations. Traders using the grid system generally create buy and sell orders 8-15 pips away from the current market price, with the expectancy of the price returning to normal, or to the forecasted level.
The main advantage of grid strategy is that once a trader has traded successfully in the manual mode and determined the correct intervals of price fluctuations of an asset, s/he can automate the strategy, becoming far more efficient.
Another advantage of Forex grid trading strategy is that it does not rely only on forecasting price levels, but rather on finding a correct interval for the placement of your orders.
How it works
You first need to determine which instruments you're going to use. It’s not a good idea to use multiple instruments at a time, as you're likely to stretch your funds. Generally, with grid trading, it’s a good idea to choose instruments that don’t expect a lot of volatility from the day’s news.
The next step is getting a good idea of the size of the grid. Although it depends mainly on the payouts you're looking for, the trading community feels that a grid should contain at least 10 squares.
When determining the size of your interval, you need to analyze the currency pairs in detail and determine the optimal fluctuation points. Also, the higher the spread on your chosen currency, the higher the interval should be.
This determines how likely you are to succeed with your grid. You need to set stop losses (SL) and take profits (TP) for each trade, as it will be difficult to keep up otherwise.
You should look at building your whole strategy around the risk/reward ratio, as this really determines the profit you're able to garner.
Remember when building this strategy, that it is not a good idea to risk more than 2% of your capital on a trade. Since the grid involves a number of orders, the maximum risk you should be setting is 1%.
The long haul
It’s always important when using a Forex grid trading strategy, to look at the broader picture when determining whether the strategy will be profitable. Looking at a single day, week, or month, is probably not going to give you the perspective you need. It may take looking at the whole year to make an accurate prediction.
Forex grid trading strategies are very popular and can make you a lot of money. As always with Forex trading, there are no guarantees and don’t expect a quick-fix.
■ Forex Grid Trading