What Is Grid Trading?
Grid trading is similar to pyramiding where the position is built on when and if the trend moves in the right direction.
A hedged grid is a play on market volatility. There are two reasons why it’s appealing to forex traders. The first is that it doesn’t “require” you to have a definitive prediction on the market direction.
The second is that it works well in volatile, ranging markets, where there isn’t a clear trend – conditions which are common in the currency markets.
This article gives some practical examples of grid trading setups, and explains under what conditions grids work as well as their weaknesses. You can try it for yourself by downloading this Excel spreadsheet below and test under differing trading scenarios.
- Grid trading system explained
- Worked example
- The ideal time to exit
- When does the grid reach maximum profit or loss?
- Testing a grid strategy
- Download demo spreadsheet
Classic Hedged Grid System
A “hedged grid” is made up of both long and short positions. As the name suggests, there’s a measure of inbuilt hedging – or loss protection with this approach. The basic idea is that any losing trades can be offset by the profitable ones.
Ideally, at some point the entire system of trades becomes positive. We would then close out any remaining positions and the profit is realized.
With this grid strategy the ideal scenario is that the price moves back and forth across one side of the grid. In doing so it executes as many of the orders and passes as many of the take profit levels on one half as possible.
A hedge grid can be proven to work well in “choppy” markets without a clear trend. However, you can still be profitable in a trending market. I’ll get onto that in a minute.
A hedged grid is a market neutral strategy. The profit will be exactly the same whether the market rises or falls. What’s appealing with this style of trading is that you don’t need to predict either a directional trend.
Grid Configuration – EURUSD Example
Let’s suppose we want to set up a grid on EURUSD and the price is currently at 1.3500. To start, our order book would look like this:
|1||Buy Stop||1.3515||-4||Sell Stop||1.3440||-75|
|2||Buy Stop||1.3530||-3||Sell Stop||1.3455||-75|
|3||Buy Stop||1.3545||-2||Sell Stop||1.3470||-75|
|4||Buy Stop||1.3560||-1||Sell Stop||1.3485||-75|
|Maximum grid loss (pips)||-300|
To create the grid, I’ve used an interval (leg) size of 15 pips and 4 levels above and below the start. There’s no definitive rules here. You can set the levels using pivot lines or any other support/resistance indicators.
You are also free to increase or decrease the number of trades as required, and change the interval and take profits to anything you like. But remember increasing the leg size and adding more levels will increase the maximum loss.
The buy-stop orders trigger if the price moves above the entry level, while the sell-stop orders trigger if the price moves below the entry level. So we always open orders into the trend with this system. See Figure 1.
Other grid techniques work the opposite way and open orders against the trend.
As the table shows, the trade pairs in the grid hedge each other. Once both sides of a trade pair are open, their P/L becomes “locked-in” at the hedge amount. When all trades are open, the hedged grid reaches maximum loss and the P/L is fixed at that point.
Running the Grid
If the price were to move in a straight line up 60 pips it would execute all of the buy orders, and none of the sell orders. So we’d finish with a profit of 90 pips (45 + 30 + 15). Likewise, if the price moved straight down 60 pips, we’d have all of the sell orders execute and we’d again end up with a profit of 90 pips.
What would more likely happen though is that the price will swing up and down causing some of our buy and sell orders to execute at different points. Say for example the price dips below 1.3500 and the first one of our sell orders executes.
Now what happens if we get a reversal and a bullish rally? Let’s say the price increases enough to hit the level for the last buy order in the grid. That’s 1.3560. So our P&L looks like this:
|1||Buy Stop||1.3515||45||-4||Sell Stop||1.3440||0|
|2||Buy Stop||1.3530||30||-3||Sell Stop||1.3455||0|
|3||Buy Stop||1.3545||15||-2||Sell Stop||1.3470||0|
|4||Buy Stop||1.3560||0||-1||Sell Stop||1.3485||-75|
When to “Close” the Grid
To keep things simple, I prefer to close out the entire grid once the sum of trades has reached my chosen profit level. In the grid above, the maximum loss is 300 pips. So we could have say 350 pips as a target profit and leave the grid to run it’s course.
With grid trading, in general it’s best to consider the entire set up as a “single system”. Rather than attempting to manage each trade in isolation. This approach makes for simple trade management.
With this hedged configuration, the ideal outcome is for the price to reach the levels on either the top or bottom half of the grid, but not both. So if the price trends in one direction, you then have to consider if a reversal is likely which would “take back” your profit.
Another choice would be to dynamically close out trade pairs once they reach a certain profit target.
The advantage of this is that you can potentially reach a higher profit target by running your profits. The disadvantage though is that you will have to wait an unknown time for the trades to run their course. And this ties up your capital and margin in your account.
When implementing a grid it’s good practice that once a level is “knocked-out” the order on the opposing level be cancelled. This avoids the unnecessary cost (in spread and swap fees) of having two opposing trades open at once when the profit outcome is fixed.
Opposing pairs cancel each other there’s no benefit in holding the two sides open.
For example, say the buy at level 1 opens, then the price falls back to 1.3440 and the sell order at level -4 is reached. The open “buy” would then be closed, and the sell order cancelled prior to execution.
Manage Your Risk
Our maximum loss for this grid set up is -300 pips This occurs when the price reaches all levels and the complete set of trades are opened. However the grid’s upside profit potential is unlimited.
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With the hedged grid, the downside risk is always limited provided all trade pairs are kept in place. Be aware that if non-opposing trade pairs are closed independently of one another, this can cause the system to become unhedged and can cause run-away losses.
This is why it’s good practice to place wide stop losses on all trades – for safe measure. In runaway markets or in currencies with low liquidity, your trades may not execute exactly at your grid levels. This can leave you with much greater exposure than planned.
It is also essential as part of the grid setup to have a clear idea of the likely market range so that your exit levels are set appropriately.
Another thing to bear in mind is to make sure when setting your lot sizes and grid configuration that your account won’t be over exposed at any point that could cause a margin call.
The main advantage of using a grid is in averaging the entry and exit prices. This method should never increase risk, but rather reduce it.
With grid trading, it’s imperative not be tempted to multiply order volume and exposure to any market beyond your accepted risk limits.
Grid Maximum Profit/Loss
A hedged grid reaches its maximum loss if all trades in the grid are opened and at that point the P/L of the grid system cannot change. The best case scenario, and maximum profit occurs when the price ascends or descends through all of the grid levels on one side of the grid alone.
For this reason when market conditions are excessively volatile, it is often better to use a grid system that opens orders against the trend rather than into the trend. This type of grid maximizes its profit when price reaches all of the grid levels.
When using this method, I’d encourage you to test out as many set ups as possible. This will give you a feel for how it works. You can download our Excel spreadsheet and try out any number of different scenarios and under different market conditions (see below).
The Excel workbook uses a highly realistic price data model, so you can be sure the results are as “real” as you can get. The advantage of simulated data over “back testing” is that you can generate an infinite number of scenarios – as well as simulate different levels of volatility and bullish or bearish trends.
The download link is at the bottom of the page.
The first simulation gave a near ideal test case. The price initially increases triggering all of our buy orders. I’ve marked the order levels on the chart with dotted lines. Those above 1.3500 are buy stop orders, those below are sell stop orders. That is they trade into the prevailing trend. See Figure 2.
None of the sell orders were reached as the price remained in the top half and reached only those levels. Our grid ended up with the following profit:
This demonstrates the worst case. In this run, the price action is very choppy and manages to reach all of the levels on the grid (see Figure 3). The final P&L is -316 pips. The maximum loss of the grid is 300 pips, however the additional 16 pip loss is due to the spreads.
In very choppy markets, when all levels are likely to be hit, the reverse strategy – the “single down” grid is preferred. For more information and a comparison see here.
For trending markets an alternative option is to use a vertical grid which aggregates the price to take advantage of a trend.
|Basic grid demo (Excel)|
|Advanced grid demo (Excel)|
Pros and Cons of the Hedged Grid System
- Systematic way to make profits under typical market conditions
- Increase the position size as a trend strengthens without risking all in one hit
- Doesn’t rely on strong trends. Grid trading can generate profits in trendless, sideways markets. Conditions which are 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.
- Easily automated to execute and manage the order flow.
- To realize profits quickly, traders are often tempted to cash in winners too early but losing trades are left to ride out with resulting deep drawdowns.
- In difficult markets a grid may be stuck in loss for a long time.
- In fast moving markets, slippage may cause your trade orders to 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 important that orders, stops and limits execute correctly. If some of your trade orders fail it can result in accumulating losses. Thus there’s a high dependence on the software and faithful execution on the broker’s end.