Traders in the foreign exchange market buy and sell currencies in order to profit from volatility in the currency exchange rate. One strategy that is designed to minimize risk by making the prosperity of a trade separate from the direction of the market is called the grid trade.
Provided that currency trading isn’t in a powerful downward or upward trend – a scenario where grid trading does not work as well- grid trading is an excellent strategy. There is an element of expertise required to implement grid trading into your forex investment plan. It is simple, however, to understand the basic concepts of this style of investing.
You do need to be aware of the fact that a buy order realizes a profit when the exchange rate increases, and a sell order profits from a downturn in exchange rates.
Starting To Grid Trade Forex
You begin a grid trade by opening a buy and sell transaction on the same currency. By doing this you are attempting to capitalize on the natural up and down motion of the market by placing orders that are both higher and lower than the market price, and profiting from the volatility in the market.
This system requires virtually no forecasting of market movements, and therefore is appealing to many investors. The downside to removing the variable of price forecasting is that you will have to deal with grid visualization, trading psychology, and money management. It is important to remember that even with grid trading, you will still have to do some market analysis.
Take for example, the easiest scenario where the forex moves straight up or straight down. As the price increases, the buy orders will be opened and closed out for a gain while the price moves upward toward the take profit levels.
If there is a reversal, and the price moves downward, then sell orders will be opened and closed for a gain while the price moves down. You then replace positions that have been closed out with new buy and sell orders.
How Does Grid Trading Work In A Volatile Market?
While grid trading works in a one-way market, it gets more complicated in a market that is moving up and down. As the FX market moves upwards, you open and close positions. It is important to remember that the price may start to fall while the buy position is open, before that position’s target price is hit.
The position will start to lose money, and as the price falls further, the loss will proceed to increase.
You also have to consider that the same situation can also happen in reverse. The price may beginning to climb ahead of your sell order’s target price.
In this case, you have an order that is below the market, and is losing money with every uptick in the market. The bright side in this situation is that your dangling buy order will start to recover as the price moves upward.
Grid Trading and Carrying Losing Positions
It is pretty evident that one of the main disadvantages to grid trading is that you may find yourself in a situation where you have one or more positions that are far away from the market price. On these positions you are still losing money, even while other positions profit.
There are financial as well as emotional aspects to carrying a losing position on a grid trade. Financially, losing positions eats away at your account’s equity and margin. If the FX market doesn’t erase your loss by the end of the trading day, you may even find yourself paying swap.
Keep in mind that you must have enough money in your account to ride out losses. Grid trading’s biggest problem is that a trader accumulates losing positions and gets margin called and closed out, ending the chances of the currency market moving back in favor of the losing position.
It may be even more difficult to combat the psychological aspects of carrying a losing position. Many people utilize grid trading due to the fact that it appears to be a way to invest in the forex without being concerned about the fundamentals of the market.
No trading system fully does away with the need to understand the basic position of any given market, at any given time