Trading techniques: grid trading

As we could see in one of article written by x-trader, grid trading was made popular by a famous character in the English trading forums called ElectricSavant, whom it was rumoured that ended up being hired by a hedge fund where he could implement his ideas.

The truth is that I do not know if that story is true or not, but from my experience I would say that if he did, it was not grid trading techniques what was used in that fund.

It is more likely that the guy designed dozens of robots, which are always welcome by brokers and market makers from all categories, which know somehow that eventually the customers will lose their money.

Does grid trading work in Forex?

Grid trading is not much different than seeing squares on a tshirt

The concept is too beautiful to work in the long run: “Too good to be true”.

If drawing some lines and rectangles was such an easy way to succeed in trading, everybody would be successful by now. But no, the truth is that it is not that easy.

The basic idea is that we will set up some orders to buy or sell that will be executing as long as the price will reach them.

If the price continues moving in the same direction then we win.

If the price recedes the trader, depending on the grid strategy, buy or sell.

If the trader decides to buy when the price moves against him he has hope that the price reverses and goes back to the previous move so he can end up with smaller loses or even a profit.

Grid Trading strategy

This I have just mentioned is nothing else than a martingale strategy that will save us many times, but that will eventually destroy us.

However, this kind of strategy can bring us huge wins if we apply it in longer term frames, being, therefore, one of the favourite strategies of those so keen on robots and automated trading.

They apply this kind of trading in niches like social trading and MT4 systems, where they find thousands of followers due to the fact that they are capable of building very successful strategies in a very short term.

Nevertheless, there will come a day when the market break in another direction.

The traders that have this strategy start adding positions as the trade keeps going in the opposite direction, hoping that some day it will reverse and we will be able to save up the day and even make a killing.

Then, it is in moments like that when grid traders, followers and all kind of martingale traders end up losing everything.

Another way of implementing this strategy is go with the trend and buy in certain points when the market moves above one price, and sell when the market moves below other price.

For example, we have:

  1. Buy Stop 1.5140 – Sell Stop 1.4920
  2. Buy Stop 1.5170 – Sell Stop 1.4950
  3. Buy Stop 15200 – Sell Stop 1.4980

In this way we would be making some sort of spread in which we would win if the market moves above 1.5140 and raise 200 more pips, or if the market goes well below 1.4928.

The worst that could happen is that the market does not go anywhere, touches 1.52 and reverses to 1.4920, moment, in which, we should close the trade, obviously.

This is a simple grid trading strategy based on price, without the need of complex indicators, which are so loved by the “get rich quick” crowd.

The example mentioned is one in which we would expect the market to take a defined trend and not reverse anytime soon.

Although it is very simple: certainly more than the one used by our popular trader of the beginning of the post.

Grid trading martingale example

Another example is that in which we buy or sell when the market goes against us.

In other words, it is trading against the recent trend.

For example, we buy the Pound at 1.5140 with a 40 pips objective.

The price falls and then instead of closing the trade I open another one at 1.5080, with the hope that the market reverses and I can take that money back.

However, the market keeps falling, and as we “know” that it will reverse eventually, we buy another contract at 1.5020. What is more, some bold guy would even double the bet, buying two contracts. To make up for the losses, you know.

The price keeps falling and touches 1.4960 when we buy another two contracts. Now the price must turn back.

But no, the price keeps falling very rapidly till 1.4900, and I decide to open three more contacts, just to get my money back as soon as the price reverses.

Eventually, the price reaches 1.45 and, suddenly, I realize that I am going to lose all the account.

At the end, the Pound reached 1.35.

That was something similar to a real case I saw once.

Obviously the traders using that technique ended up losing all their accounts.

Best Grid trading technique?

This is, obviously, a very simple way of describing this strategy, and there is uncountable people using it with more complex ways.

That, nonetheless is not obstacle for the fact that most of those traders will fail miserably.

The market never stays the same, and two years of very trendy markets may be followed by three of “going nowhere markets”

This is why it is so difficult for these systems to win, whether they are based on this or any other system.

The true real masters of the grid trading are the market makers of all markets. They really know how to apply the lines and squares in their favour. That is what they call: bid-spread. That we cannot do.

Those who want to make a living out of this kind of systems will have to do much better, I am afraid.

Regards and good trading.