There are hundreds of trading strategies used by new and experienced traders. The most common strategy is price action, where traders follow the trend. Other common approaches are scalping, swing trading, and hedging strategies.
The challenge for any new trader is to find a trading method that suits his or her style. With so much information about strategies online, new traders often find themselves confused about the best strategy to use. This article will focus on the grid trading strategy, which is commonly used among more experienced traders.
Why forex traders use the grid trading strategy
This approach seeks to take advantage of the normal price volatility that happens in the currencies and CFD market by using limit and stop orders. The pending buy and sell orders are placed at regular intervals above the market price.
To use the strategy properly, it is important to understand what pending orders are. Pending orders are provided in the most forex trading platforms to enable traders to initiate orders even when they are not present to do so manually. The two common types of pending orders are limit and stop orders. A buy limit order is an order to buy a security at or below a specific price. A sell limit is an order to sell at or above a specific price. On the other hand, a buy stop is an order to buy a security at a price above the current price while the sell stop is an order to sell a security at a price below the current price. A security refers to currency pairs, commodities, indices, cryptocurrencies, or stocks CFDs.
Traders use the grid strategy for several reasons. First, it does not require knowledge of the fundamental releases in the market as those found in the economic data including the unemployment rate, industrial production, and interest rates. They also include market-moving news like the devaluation of a currency and news about trade. Traders who use other approaches spend their time focusing on financial news and data. Second, the approach is appropriate when trading in range bound markets, which are not popular with trend traders. Third, it has proven to be an effective method for experienced traders.
How the grid trading strategy works
The first step in a hedged grid trading strategy is to identify the securities. Ideally, a trader should use securities that are not moving aggressively in one direction. Next, you should look at the chart and look at the direction the security is moving. Then, you should select the size of the grid. The size is usually given in pips. Often, traders use pips between five and 50. Finally, you should decide on the profit target for each unit.
After identifying the security, you should now open similarly sized buy and sell trades. If the price of the currency pair moves up and reaches the first target, you should close the trade and take the profit. Then, you sell at the first target while leaving the first sell trade running. As the price drops, the first and sell trades will be profitable.
For example, assume that the EUR/USD pair is trading at 1.0850, and you are using a grid of 50. In this case, you will buy (B1) and sell (S1) simultaneously at the 1.0850 level. If the price rises to 1.0900, you will simultaneously buy (B2) and sell (B2) the pair again, while closing the profitable buy trade (B1). If the price falls back to the base 1.0850, you will simultaneously buy (B3) and sell (S3) the pair and this time, close the profitable sell trade (S2) initiated in the second trade above.
You should then repeat this process until the trades become profitable. Remember, using the hedging strategy does not require a stop loss because in case of a major market movement, one trade will be more profitable. To initiate trades simultaneously, it is recommended that you use a computer platform and a mobile app to open multiple trades at once instead of just one trading platform. Doing this will help you eliminate slippage. Slippage is the slight movement in price of a security that happens when initiating a trade.
The grid trading strategy unhedged
The other type of grid trading strategy is one that is unhedged. In this, the trader uses pending orders described above and does not require two opposite trades. In it, the first step is to select the direction of the security. You can do this by just looking at the chart and seeing the direction the security is moving. If it is moving up, your strategy will be to buy. Then, you should decide the unit sizes of the grid.
If the market price of the EUR/USD pair is at 1.1200, and your grid size is 10 pips, you can place buy limit orders at 1.1210, 1.1220, and 1.1230. At the same time, you will place sell limit orders at these levels. In this case, if the pair reaches the 1.1210 level, the buy and sell limit orders will be initiated. If it continues to move up to 1.1250, the profit of the buy limit trades will be more than the losses of the sell limit trades.
The grid trading strategy is an ideal method for experienced traders and slightly difficult for new traders. To use it well, it is recommended that you take time to learn more about it and practice using a demo account. Doing this will help you sharpen your skills and identify the ideal way to apply it on your trading.
