Pros and Cons of the Forex Dual Grid Strategy

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Dual grid strategy, how it works and expected results.
Dual grid strategy, how it works and expected results. © forexop

The “dual grid system” is a variation on the grid trading theme which I’ve talked about before on forexop. The basic difference between this strategy and the classic hedged grid is that we place our buy/sell grid legs at the same price levels.

This means we are both long and short at the same point. So with the dual grid, at each leg we have one position trading into the trend and the other position which is opened against the trend. The result is a bi-directional grid.

This may seem a bit counter intuitive, but in choppy, volatile markets, it can be highly effective.

One thing forex traders like about this strategy is that it’s market neutral. That means we don’t need to forecast the way in which the market is going to move. This is one of the key advantages of this approach. However one important difference between this and the hedged grid is that this method can lose if there’s a strong rally on the down or upside.

When you’re using this strategy, it needs careful management of stop losses and take profits. There is an amount of inbuilt hedging from the offsetting positions. But even so we still need to carefully control the losing trades in a strongly trending market to prevent heavy drawdown. See my scenarios below for more on this.

Let’s have a look at an example to see how the grid works in practice. I’ve created an Excel spreadsheet to do the calculations. This will allow analysis and fine tuning of the strategy without risking real money.

EURUSD Dual Grid Configuration

Suppose we have EURUSD trading at 1.3500. To start the grid at this point, my order book would be made up as follows:

Order Entry Take Profit Order Entry Take Profit
Buy Stop 1.3562 1.3587 Sell Limit 1.3558 1.3533
Buy Stop 1.3547 1.3572 Sell Limit 1.3543 1.3518
Buy Stop 1.3532 1.3557 Sell Limit 1.3528 1.3503
Buy Stop 1.3517 1.3542 Sell Limit 1.3513 1.3488
Buy Market 1.3502 1.3527 Sell Market 1.3498 1.3473
Buy Limit 1.3487 1.3512 Sell Stop 1.3483 1.3458
Buy Limit 1.3472 1.3497 Sell Stop 1.3468 1.3443
Buy Limit 1.3457 1.3482 Sell Stop 1.3453 1.3428
Buy Limit 1.3442 1.3467 Sell Stop 1.3438 1.3413

If you read my other piece on the hedged grid, you’ll recognize that this is basically a combination of two grids: a hedged grid plus an “inverted” hedged grid.

The hedged grid is a “single up” system as it opens trades into the trend, or “averages upwards”. The other, trades against the trend, and is known as a “single down” system because it “averages downwards”. These two grids are exact reversals of one another.

When one side is in profit, the other is in loss and vice versa. There are several ways to trade with this system. One involves managing the two grids as two entirely separate systems of trades. Each side has it’s own profit target and stop loss.

The second option uses a swing strategy, and involves managing trade pairs individually. This can work if volatile, whipsaw price action is expected. In this case, profit targets are set on each trade pair. In the case above, I’ve used an interval of 15 pips and a take profit of 25 pips, with a 4 pip spread.

Experimentation is the key to success with this strategy: Some set ups work better than others for given market conditions. With grid trading, there isn’t a “one size fits” all or a magic formula that will always work.

The Dual Grid – In Action

The buy market and sell market trades start off the dual grid system. We can execute these orders immediately as they’re already at our current market price level. So from then, on the long side our stop orders execute when the market rises above the current level. These are trading into the trend. Our buy limit orders execute if the market goes below the current level. These trade against the trend.

Schematic of a how a typical dual grid works
Figure 1: Chart showing dual grid buy/sell legs open and closes. © forexop

The converse happens with our sell orders. The sell limit order triggers when the market rises, and our sell stops trigger if the market falls. See Figure 1 for how this plays out in a typical situation.

As you can see from my test results in the table below, I tested both with and without stop-losses with mixed results.

Simulation Result (10) SL=80, TP=50 SL=40, TP=50 No SL
Total 184.1 1373.3 -838
Average 18.41 137.3 -83.8

I ran 10 simulations of the strategy, with SL/TP, and no SL/TP. I also included a cut-off so if the grid fell below -600 pips, I closed all positions.

If you want to try your own scenarios you can freely download and use our forexop Excel workbook. The workbook generates all price data – you just need to enter in your trading set up and press F9 to run the scenario.

The download link is at the bottom of the page.

Alternatively, our live trading tool will allow you to practice grid trading setups and test the outcome.

Risk Control with the Dual Grid Strategy

Risk management, as well as trade management is easier when the two grids are treated as separate systems. This is because they have well defined profit and loss boundaries. This helps in deciding if one side of the grid should be closed, either at a take profit point or at a stop loss. And, because the two grids are “reversals” of one another, markets conditions where one side profits, will cause the other side to suffer and vice versa.

My preferred option is to have a profit target and maximum stop level for the two sides. I close out once the profit target is reached on one side, regardless of the P&L of the individual trades. Likewise, I have a stop loss for the group – usually about 2/3 the target profit, and close it if it’s exceeded.

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How to implement a successful grid strategy: Step by step

This ebook is a must read for anyone using a grid trading strategy or who’s planning to do so. Grid trading is a powerful trading methodology but it’s full of traps for the unwary. This new edition includes brand new exclusive material and case studies with real examples.

A step by step approach to a successful grid strategy.

When managing the trades individually, the question comes as to where to place the stops and take profits. As this method doesn’t “assume” any prior forecast on market direction, we shouldn’t assume any better than average odds of a single trade ending up in profit, given that it opens. Actually it’s slightly less than this because of the spread, but to keep things simple lets just assume its 50:50.

Whipsaw price movements will often make “at the money trades” flip between profit and loss within minutes or seconds.

If your stop losses are too tight, there’s a higher probability of the price crossing the stop thresholds too quickly, and the trade ending up in loss. Simply because the stop loss is a nearer threshold to cross. In this case many of your trade pairs will get taken out by “market noise” before either of them reach their profit levels.

But each trade pair is hedged up until the point one side is closed. So if your stop losses are much wider than your take profit, this can mean a higher percentage of your trades end up in profit simply from swings in the market.

When doing this, it’s a good idea to keep tabs on your overall grid P&L to keep drawdowns to manageable levels. Your average entry rates can be calculated iteratively each time a new trade is opened. From these you can calculate the P&L at any point.

Wider stop losses can work because when the losing side is closed, the other half will be in profit. The ideal is then that the price reverses and a net profit can be achieved for the trade pair when the second half is closed.

Basic money management means taking these things into consideration and deciding how much can be risked per trade, and limiting the maximum loss on the entire system.

Test Results

Simulation #1

I started each run at price level 1.3500. A take profit target of 100 pips was set. No stop loss was used.

My first run of the strategy gave a positive result. As can be seen from the chart in Figure 2, the price bobs up and down across most of the grid levels in the top half, and we achieved 2 take-profits on the trades. The others ended with mixed profits and losses. Overall the net profit was 185.1 pips.

First run of the dual grid strategy, profitable result
Figure 2: Favorable results, where the price swings across the top area of the grid. © forexop
Order Entry Limit O C Net Order Entry Limit O C Net
Buy stop 1.3560 1.3660 Y N -30.1 Sell limit 1.3560 1.3460 Y N 30.1
Buy stop 1.3545 1.3645 Y N -15.1 Sell limit 1.3545 1.3445 Y N 15.1
Buy stop 1.3530 1.3630 Y Y 100.0 Sell limit 1.3530 1.3430 Y N 0.1
Buy stop 1.3515 1.3615 Y Y 100.0 Sell limit 1.3515 1.3415 Y N -14.9
Buy limit 1.3485 1.3585 N N 0.0 Sell stop 1.3485 1.3385 N N 0.0
Buy limit 1.3470 1.3570 N N 0.0 Sell stop 1.3470 1.3370 N N 0.0
Buy limit 1.3455 1.3555 N N 0.0 Sell stop 1.3455 1.3355 N N 0.0
Buy limit 1.3440 1.3540 N N 0.0 Sell stop 1.3440 1.3340 N N 0.0
Net P&L 185.1 Pips 154.9 30.3

Simulation #2

Here’s a good example of where trending can ruin profits in a grid strategy. In this run, the buy orders at the top of the grid were executed. But the profit on the longs were offset by the short positions on both sides of the grid. So the overall loss was -658 pips in this case.

Example of where dual grid loses in bullish trend.
Figure 3: Negative scenario with trending conditions, and fewer swings. © forexop
Order Entry Limit O C Net Order Entry Limit O C Net
Buy stop 1.3560 1.3660 Y Y 100.0 Sell limit 1.3560 1.3460 Y N -167.2
Buy stop 1.3545 1.3645 Y Y 100.0 Sell limit 1.3545 1.3445 Y N -182.2
Buy stop 1.3530 1.3630 Y Y 100.0 Sell limit 1.3530 1.3430 Y N -197.2
Buy stop 1.3515 1.3615 Y Y 100.0 Sell limit 1.3515 1.3415 Y N -212.2
Buy limit 1.3485 1.3585 Y Y 100.0 Sell stop 1.3485 1.3385 Y N -242.2
Buy limit 1.3470 1.3570 Y Y 100.0 Sell stop 1.3470 1.3370 Y N -257.2
Buy limit 1.3455 1.3555 N N 0.0 Sell stop 1.3455 1.3355 N N 0.0
Buy limit 1.3440 1.3540 N N 0.0 Sell stop 1.3440 1.3340 N N 0.0
Net P&L -658 pips 600.0 -1258.0

Basic dual grid demo (Excel) 
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Advanced grid demo (Excel) 
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Pros and Cons of this Method

Pros:

  • You don’t need to be able to forecast which way the market will move.
  • Works well in volatile, predominantly sideways markets.
  • Can be highly effective under right conditions – especially rapid price swings across the grid.
  • It is relatively simple to automate the strategy and to calculate the overall grid P&L.

Cons

  • It requires more complex trade management than using either the single up or single down grid.
  • Because of the hedging, the dual grid doesn’t work well when there are strong directional trends and fewer price swings.
  • It can result in heavy losses if the TP/SL are not properly managed.
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About the Author

Steve Connell has spent over 17 years working in the finance sector as a trader/market maker and strategist. Over that time he’s worked for several global banks and hedge funds. Steve has a unique insight into a range of financial markets from foreign exchange, commodities to options and futures.

5 Comments
  1. Hi Steve Connell

    I’m interested in the Grid.

    I have a question about Grid.

    Do you can calculate the grid On the basis of nothing?

    thank you
    pete

    • Not on nothing, no. The basic choices: when to enter, the stop/profit levels, and the grid setup (which grid) will depend on several factors. The most important being whether the market is trending or ranging, and the volatility levels that are anticipated. Please see this article for a full explanation of this.

  2. Hi Steve,

    I’ve just come across your blog and find it very interesting, especially the articles on grid trading. I’ve downloaded your “Excel simulation workbook”, but unfortunately my corporate antivirus software does not like it at all. It’s in the form of a zipped executable file (.exe) which is a bit strange for Excel? Do you have a native Excel file for download (or maybe you’ve been hacked and this is a virus!)?

    Thanks, Nigel

    • Update: The examples are now all in native Excel format so you should not have any problem running them. They are also “macro free” so there should be no issue at all with anti-virus software. If you have any difficulty please contact support.

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