Grid is a unique approach to forex trading. It doesn't require market analysis for accurate position entry. Grid forex strategy looks to take advantage of inherent structure and volatility of forex market, to produce steady gains. This is done by placing trading grid in various intervals, closing the trades regularly on take profit and reopening them, when market reaches the same price level again. This process can be repeated many times a day. When set and placed correctly, it closely reminds mining facility or almost passive business. In this article we are going to discuss our strategy for placing Grid, that was tested both on historical and forward data with positive results.
What is grid forex strategy Grid forex strategy is a mechanical type of trading. As such it doesn't require accurate prediction only a general idea about the price. Grid will take advantage of inherent wavy structure of the market (volatility). No complicated analysis is required. Trader just cant be completely wrong. He must also understand relationship between leverage, margin and loss to be able to accurately gauge max risk for his Grid.
Correctly set Grid will close profitable trades regularly across multiple price levels. It can also operate with minimum supervision for months or years ( our current grid is operating for 4 months without any intervention at all).
Grid can produce steady and predictable gains taking advantage of chaotic price movement and low trading costs in forex to extract money from the market.
No prediction necessary with grid forex strategy With grid trading, you don't have to deeply analyse market before each entry and then pray for it to go your way. Considering how chaotic the forex market is, even the best traders are very often wrong. Analysing the market takes a lot of hard work and only the best in the game are able to make steady living out of it.
With Grid you don't play the analysis game. Forecasting for grid takes a moment and such grid can operate without pause for months or years without any additional intervention.
Forecasting for a directional grid can look like this:
We scan multiple pairs and notice that pair is ranging close to the top of its historical range. There are multiple resistances above the current price that would restrict upward movements, cause corrections or send price down immediately. Short grid therefore looks viable.
We decide number of max trades in grid, grid spacing and make sure we can take max loss of the gird. Short grid is placed and can remain operational until instrument price gets too low (our max loss for short grid increases too much). This can easily take years while forecasting took only few minutes at best.
Is grid forex strategy suitable for beginners ?
Grid forex strategy as outlined here requires minimum analytical skill and takes minimum time. Almost always, automated system is used to open and close grid trades. In our opinion this makes the grid as suitable for beginners as any other forex trading system.
However, grid is absolutely not suitable for undercapitalized traders or traders in need, that need to make money yesterday. Almost always, this ends up in failure.
If you don't have minimum of 2000 USD to be allocated for the 0,01 lot grid, this system might not be for you or you should consider trading it on cent account. Cent account enables you to open and manage grid in real market conditions while risking 20 real USD for 2000 USD grid. You will still be able to earn few bucks (literally) while learning and gaining confidence and a feel for the grid.
To sum it up.
Is grid suitable for beginners - YES.
Is grid suitable for undercapitalized traders - ABSOLUTELY NO.
Can undercapitalized traders still trade grid - YES, On a cent account.
How much capital do you need to run this grid forex strategy Try to understand your grid as a profitable business that needs a capital to run. It also needs some capital to survive the crisis or a bad market period. Smart businessman knows that bad periods are certain and therefore he remains ready. Approaching the grid in any other way is a mistake.
The rule of the thumb is to have enough balance and than have some more in store. You need to become strong holder. Do not be a weak holder that is getting margin calls and heart attack every time market swings against him.
Golden rule of the grid trading: If you can't afford it, don't buy it.
Directional grid can work with countless different setups, with various grid sizes, grid spacings and number of trades. Capital requirements for each individual grid should be calculated in case by case basis.
However for our model of grid discussed in this article you would need at least 2000 USD per currency pair. You should also be able allocate additional funds if necessary.
It is also necessary to note, that worst case scenario (max loss) should be extremely rare. Our grid methodology aims to place the grid in a way , that max loss is never (or very rarely) reached.
It is the nature of the system that by the time the market reaches our max acceptable loss, grid should be already able to close hundreds or even a thousands trades in profit.
With grid time is your friend. But for a time to be a friend with you, you need to have enough capital.
Time is your friend with grid forex strategy
Using Grid forex strategy gives trader one undeniable benefit. Advantage of time. The longer your grid remains open, more profit will it be able to generate. This is part of the reason why you don't have to be accurate in you prediction.
All you really need, is for the price to move long enough within your grid range swinging up and down with typical forex volatility. If you place your grid well, making sure it can cover substantial instrument range, it can generate profit for months or even a years without any intervention.
Grid that stayed open long enough, will be profitable even if the price moves to the end of it, requiring its closing at loss (reaching max loss of the gird, or the last trade of the grid).
In order to make time your friend, you need to make sure your grid covers substantial range of the market. This requires using wider grid intervals (distance between trades) and to consider historical range of the market.
Historical lows/highs in the market represent massive support/resistance in the price structure, that tend to bounce the price one it moves significantly against you. This fundamental market structure allows grid to survive long enough to produce profit.
Our directional Grid methodology
Our grid methodology is aimed to place directional grid according to historical range of the market. The goal is to place it in a way that would enable it to operate indefinitely and with minimum intervention. The Grid spacing will be wider, enabling us to cover whole part of historical range of the instrument.
Grid is closed and moved to another instrument once the price moves too far in the direction of our initial entry.
Grid can be also closed at loss once price surpasses its range in negative direction. However Grid should be placed in a manner that those situations will become extremely rare. It this worst scenario we would opt to add more capital to the account to be able to run grid for longer.
However this depends on trader preferences, risk appetite and available capital.
This Grid forex strategy uses Grid MT4 Expert Advisor we have build for trading. It is also subject to our live forward test.
How to place grid with our forex strategy
To place the grid according to our forex strategy, we need to find forex pair that is traded close to its historical low/high.
To do so, we browse forex instruments, looking for a pair being traded in upper or bottom quarter of its historical price range.
To place a short Grid, at least two historical resistances (historical highs) should be present above the current price. Current price is in upper quarter of historical price range.
To place a long Grid, at least two historical supports (historical lows) should be present below the current price. Current price is in bottom quarter of historical price range.
This will protect our grid from sudden movements against our position, create volatility and corrections that we will be able to profit on, in case the price moves against us.
Once we identify suitable pair for trading, we prepare Grid MT4 Expert Advisor to place the grid.
What currencypair to use with our grid forex strategy Among all available pairs we chose only the the ones most suitable for grid placement preferring those moving closer to the outer edge of its historical range.
To place grid simultaneously on multiple pairs we first calculate max potential loss for our Grids and make sure we have enough free capital to handle worst case scenario.
We should also prefer more volatile instruments with lower trading costs.
How to determine grid size with our methodology
First thing that needs to be established is a total grid size. We do so by measuring pip distance from our current price to the edge of historical range of the market. If we are looking for a short grid we will measure the distance from our current price to the highest historical price (and vice versa for long grid).
Once we measure this historical range of the market, we double it to get our total grid size. If historical price range was 500 pips our total range of the Grid should be 1000 pips.
This is done, to ensure that our grid has enough space to operate and would not be closed prematurely.
Remember, the goal is to not close in a loss. Our grid needs to be wide enough to survive in the market months and years. Los Should not be an option. Instead we should be ready to play the waiting game on the edge of the market range (time is a friend) in worst case scenario.
How to determine grid spacing with our methodology
We have already established necessary grid size in previous step. Now we been to determine grid spacing - distance between individual trades.
We will typically use 200 - 500 points distance between the grid trades with take profit of same distance.
Grid spacing should be made wider or more narrow according to few criteria:
Total grid range: Wider the grid wider the grid spacing
Free account balance: Bigger the free account balance more narrow can grid spacing be.
Narrow grid will produce higher drawdown in the same range compared to wider grid. However it will be also more effective extracting the money out of market volatility. To establish what grid spacing we can afford, we need to calculate max loss of our grid.
Risk for the grid forex strategy (max loss).
Under any circumstances we must have enough capital to sustain our grid. If we don't have enough balance, we do not open the grid in the first place.
Risk for the grid represents the drawdown we should be prepared for once we reach maximum capacity for the grid. This means that the price reached the total range of the gird and all allocated positions are opened. This represents the worst case scenario for our allocated balance and we should be ready for it.
However few thing needs to be noted. By the time grid reaches its full range, hundreds of profitable trades have been already closed, increasing our balance. This can mean that by the time this happens, our max loss for the grid is already fully covered with profit.
Also if we chose the instrument correctly and set our grid correctly, this situation should be extremely rare.
Once the price reaches our outer edge of the grid, we basically have two options. Close the grid. Accept loss, move onto the next instrument or restart the grid at better price.
If we have reasons to believe that price reached new high/low and correction will follow. We add more capital to the account to enable wider grid.
Personally, we would always opt for second option. Our grid is based on whole historical range of the price and it's not meant to be closes in loss.
How to estimate risk for the grid forex strategy.
Estimating the risk for your grid is the key element for its success. You need to be absolutely certain that you can sustain your grid with your capital !
To estimate the risk for your grid you simply and effectively, multiply the average loss of the trade by the number of trades in the grid.
This will give you and estimate for the worst case scenario. This is the capital that you must have to sustains you grid.
Furthermore, you still need to be able to sustain you margin requirements for all your trades in the grid.
Before you commit to the grid, you need to make sure you have enough capital both to cover the drawdown and margin requirements.
How to make grid forex strategy work
Mechanical grid takes advantage of inherent market structure and its volatility. It doesn't require specific prediction - trader just cant be completely wrong. Time is a friend with a grid. the longer it remains open the more profit it is able to generate. It requires only little to none intervention and can remain operational for months or even a years. With sufficient capital and when placed and calculated correctly, grid can produce steady and predictable profits with acceptable drawdown.
Given all thos facts, grid is as foolproof of a system as it gets in forex.
Still many people fail with it miserably.
Undercapitalization and overleveraging are the main factors that will make grid work against you. Trader will typically see only the winning side and fails to prepare for market moving against him. This will make him open the gird that is too aggressive and to narrow for his account. Once the price moves past all his grid levels he will have no other option that to give up at massive loss. He will have no capital left to open any additional trades away from his initial grid. The factor of time will not play in his favour.
How to make the grid work for you:
Know the total risk for your grid and have free balance to sustain it.
Make sure there is professional support/resistance protecting your grid from rapid moves against it. Ideally few massive historical S/R zones should be present in your grid range.
Use microlot positions
Use wider grid spacing, this will lower your trading costs and enable you to cove much wider market range.
Total grid range should massively overlap your main S/R zone (the price level you don't expect to be reached as historical market low or high). In other words. Be prepared for price to do the unexpected thing and move past those zones.
Have reserve capital to recalculate and sustain the grid once it approaches the max loss.
Closing the grid
Correctly set grid will remain operational for a long time. The longer it works, the more money will it be able to extract out of the wavy structure of the market. Grid makes money out of the price movement. Ideally, grid will remain open for a long time before we close it.
We do so once the price moves substantially in the positive direction, closing initial trade of the grid multiple time in profit. This moves starting point of the gird to unfavourable price. Once price moves few hundred pips below our intended grid starting point, we abort the mission and instead wat for a price to return to previous level (closer to the historical price edge). We will still able to make some profit and possibly able to reopen the grid again at better price.
Ideally price will move drastically in our desired direction only after months ranging through our grid.
But what to do once price approaches max loss for our grid ?
Considering that our grid covers substantial range of the market, it is placed at favourable price and protected by multiple S/R zones with massive overlap - this scenario should be extremely rare.
Once it happens, profit generated by the grid should already cover substantial part of the drawdown.
Basically there are two options to approach this situation. If we lose trust in our grid we can simply close it at current loss and move on.
the second option (and the one we would prefer) is to recalculate the grid to make it wider, add reserve capital (that should be ready for that case) and keep the grid operational long enough for it to cover for loss and generate new profit. don't forget time plays in our favour and wide enough gri can generate profit at any price level.
Disadvantages of grid forex strategy
Just as any trading system even the grid trading has its disadvantages.
If the price moves against our positions sharply and consistently for prolonged prolonged time, drawdown will be consistently present in the account and it can get quite substantial.
Therefore this system is definitely not for traders who tend to panic as the market moves against them or can't deal with their positions being consistently in red numbers.