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What Is Grid Trading Strategy and How to Use It?

Grid trading strategy is based on the concept that considers a positioning strategy to be even more important than proper timing. So, what is a grid trading strategy? Basically, it introduces techniques where traders tend to place several sell/buy orders within a regular timeframe based on target gains rather than stop loss.

Grid trading strategy

Once the market price has met a pre-set target gain, the order is closed and followed by the same number of buy and sell orders opened within a new regular time frame either below or above the predefined price level. As a result, a trader creates something like a web or a net of constantly updating orders placed above or below the set price to generate higher profit when participating mainly in the fluctuating market.

How to Use the Grid Trading Strategy

The trading technique is based on a so-called “mean reversion” approach. This is why it works best in case of fluctuation. However, the tactics can be different depending on the spot price regression. This may involve futures contracts, perpetual prices, etc. In most cases, the grid strategy is often associated with arbitrage, while some traders consider them twins, especially when it comes to trading coins.

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Is Grid Trading Profitable?

In case of a choppy price, traders can identify signals for buy orders when placed above the pre-defined level. At the same time, sell signals occur when the trade is placed below the set price level, resulting in losses. On the other hand, traders can make the most of the grid strategy and generate maximum profit when the trend sustainably moves in the same direction. If the price keeps moving back and forth (oscillating), this particular technique can make no sense or even bring bigger failures.

Here is how the grid strategy works:

  1. Set buy/sell orders below/above the set price level.
  2. If the price goes down, it is a signal for the trader to go long.
  3. If the price goes up, it is a sign to go short.
  4. You can generate profit for as long as the price keeps bouncing and oscillating sideways.
  5. When the price moves sideways, it triggers either sell or buy signals.

The only problem with the grid trading strategy is that the risk is very hard to predict and, what’s even worth, to control. Traders are supposed to use risk-management tools and place stop-loss orders to avoid holding the losing position for longer than needed.

Analyzing the Grid Trading Strategy Risks

In theory, the techniques may look like an ideal tactic with an absolute return. Generally, it is utilized by medium-to-low frequency traders and investors. However, these types of trades still come with certain risks while the medium-to-low concept is considered the less risky. In reality, potential risks are very hard to foresee. They involve:

  • Force-Liquidation Risks – they generally happen in the case of the one-sided market. When using hedging strategies in reference to arbitrage, a leg can fail to leave you with not enough sufficient to overcome uncontrollable risks that arise due to expanded market fluctuation. The solution is to use a lower-leverage ratio and use margins as a tool to protect other running positions.
  • Fees – they are the inevitable part of arbitrage. Sometimes, they are low enough. However, at some point, you may not have enough profit to cover either funding or transaction fees. This will inevitably create larger grids.
  • Problems with Futures Contracts – it results in the need to cover all running positions before the contract is closed.

The Bottom Line

The grid trading strategy looks quite safe with lower risk if compared to other trading techniques. Traders have a chance to use specific tools to lock themselves in profit as well as benefit from low transaction fees when opting for medium-to-low strategies. However, high-frequency tactics come with higher fees and more risks involved due to increased market fluctuation. The good news is that the strategy is easily feasible even without technical background whenever you want to configure it.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.