Forex traders use grid trading strategies to profit from the volatility of the currency markets. By placing buy and sell orders at levels above and below the current price of a currency pair, they try to profit from price moves in both directions, with zero or very little analysis.
Designing a Grid
First, you must design your grid. A Forex trader's grid design will depend upon personal strategy and risk tolerance, but most grids are fundamentally very similar. They comprise buy and sell orders placed at standard spacing above and below price. For example, if your chosen spacing is 10 pips and the current price of a currency pair is 1.2550, you place buy orders at 1.2560, 1.2570, 1.2580 and 1.2590. You place sell orders at 1.2540, 1.2530, 1.2520 and 1.2510.
Setting Your Target
Set predetermined target levels for each buy or sell entry. Forex traders use a take-profit order, which is an order to buy or sell a currency pair automatically, exiting the trade and locking in profit. Generally, traders set a take profit that's an equal number of pips away from the entry as the spacing of their grids. A pip is the smallest increment of price movement in the currency markets. If you are using 10-pip spacing, place take profit orders 10 pips above every buy order, and 10 pips below every sell order.
How It Works
When price rises to the first buy order at 1.2560, you will be entered into a long trade. A long trade produces profit as price rises. If price rises by 10 pips, you will earn 10 pips of profit. At the same time, you will be entered into a second long trade as your buy order is hit at 1.2570. This will continue as price rises. Conversely, if price falls from its initial level, your sell orders will be activated and the same process will take place in the opposite direction.
Controlling your Risk
Grid trading can be very risky because of "dangling trades." A dangling trade occurs when one of your orders is hit and price-reverses before reaching your take profit. The further the price moves from your entry, the higher your loss on that trade. One large loss from a dangling trade can wipe out a high number of gains from your winning trades. To avoid this, you can place stop-loss orders on your entry orders. A stop-loss order closes out your trade if it reaches a certain level above a buy entry or below a sell entry. Some grid traders with large accounts prefer not to use stop-loss orders; they rely upon price reversing before the loss gets too big. If you decide to use a stop-loss order at a particular level, Forex Pub suggests, "Ideally, this stop loss would not be hit unless the trade was convincingly moving away from a profit, and it will also not make the (possibly large) loss exceed the numerous small wins that a grid system generally earns."
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