What is Forex Grid Strategy?

20 August 2020

The Grid strategy in Forex is one of the automated methods of trading, which essentially removes the stress of manually opening and closing positions. It involves placing several buy and sell stop orders with predetermined intervals above or below the current market price.

Trading with Forex grid strategies involves several steps. Basically, traders must determine whether a currency pair is engaged in a trend or is confined to some trading range. After that, he or she must choose a starting point and then decide on the number of grid levels and appropriate intervals.

For example, if the GBP/USD pair trades at 1.2475, then a trader can put three buy stop orders at 1.2485, 1.2495 and 1.2505, with 10 pip intervals. At the same time, he or she can place three sell stop orders at 1.2465, 1.2455 and 1.2445.

Generally, in the Forex grid trading strategy traders can benefit both when currency pairs are trending or when they are confined to some range. However, each scenario requires a slightly different method.

There are several components for successfully trading with Forex Grid strategy.
Firstly traders must have an effective exit strategy in place. The important thing to consider here is that if traders do not also have a clearly defined stop loss level in mind, holding a losing position indefinitely can lead to major losses.

Finally, it might be helpful to point out that, when using the Forex grid system strategy, it is essential to choose a broker and account with no commissions per trade, since those kinds of expenses can significantly eat into traders potential payouts.

Forex Grid Trading Strategy Explained

As mentioned above, before a trader starts trading Forex with the grid strategy, it is essential to analyze the charts. This is to determine whether the given currency pair is engaged in an uptrend, downtrend or just settled for some trading range.

Using a 50 day Simple Moving Average (SMA) can be very helpful. In fact, we can make several observations about this indicator:

A consistently rising or falling SMA line can be an important sign for the formation of the trend.

On the other hand, if the Simple Moving Average line is relatively flat, then this could signify that the pair might be confined for a trading range for some time.

Consequently, each of those scenarios requires the adoption of different techniques. Therefore, there is no one best Forex grid strategy that can be used in all cases.

Obviously traders can also use 5, 20 or even 200-day moving averages in conjunction with 50 SMA, for the purpose of getting more clarity.

So let us begin with the first scenario. Suppose the trader analyzes the charts of several currency pairs, Simple Moving Averages, other indicators and identifies a clear trend. What should be the next step?

In order to simplify the matters let us return to our previous example: suppose that the current market spot price of GBP/USD is 1.2475 and it is determined that most likely the pair is engaged in some kind of uptrend or downtrend.

So if a trader uses the grid strategy to Trade Forex then, in this case, he or she can place the following orders:

Best Forex grid strategy

As we can see from the table above, this includes 3 buy and 3 sell orders with 10 pip intervals. Therefore, if there is a strong uptrend and GBP/USD to 1.2525 level, then along the way those 3 buy orders will be triggered and traders will have 3 winning trades: the first one will gain 40 pips, the second = 30 pips and the third trade will earn payout worth of 20 pips. That's 90 pips worth of gains in total. Another good news with this scenario is that an individual does not have to worry about those 3 sell orders since in this case they will not be triggered.

So what happens if the market goes in the opposite direction? Let us suppose that because of some bad news for the British economy or some other reason Pound declines and GBP/USD falls to 1.2400. In this case, 3 sell orders will be triggered. The first trade will gain 65 pips, with second and third gaining 55 and 45 pips respectively. All buy orders remain intact and the trader archives a payout worth 165 pips.

Finally, it might be useful to mention here that the actual number of buy and sell orders, as well as intervals between them, are entirely dependent upon the trader’s preferences. For example, some market participants might feel more comfortable using 5 or 6 sets of orders with 20 pip distance between them or any other variation.

Using the grid strategy against the trend

Now let us move on to the second scenario. Suppose that trader analyzes the GBP/USD charts, moving averages, other metrics and comes up with a conclusion, that the pair is consolidating and is mostly confined to the 1.2400 to 1.2500 range.

So how would Forex trades, using the grid trading strategy, deal with this situation? Well, clearly in this case orders have to be arranged differently:
Forex grid trading strategy explained

As we can see from the table above, here buy orders are placed below the market sport price and sell orders above that level. The basic idea here is to benefit from volatile market conditions. Let us consider an example where the Pound collapses to $1.2415 and then rises to $1.2505.

Firstly as the pair falls to 1.2465 level, the first order will be triggered and the trader will open a long GBP/USD position. The same will happen with the remaining two orders, as the price declines further. However, once the tide turns and the pair goes all way up to 1.2505 sale orders get activated and each position can be closed with 40 pip gain.

So to sum up, all of those 6 orders will be triggered and in the end, the traders could potentially end up with 120 pips of the worth of gains.

Some experienced professional traders even use two sets of grids together, it is called a Forex dual grid strategy.

Stop Loss orders

As we have seen from the examples above, there are many scenarios where a trader can achieve significant payouts using Forex grid strategies. However, defining the Forex grid trading strategy as some infallible fail-proof method can be very misleading. It is essential to point out that those techniques do not guarantee a 100% success rate. In fact, there can be several cases when things might go wrong.

Returning to our example from the first chart, it might happen that GBP/USD moves up to 1.2485, triggering the first buy order. However, instead of developing a trend, let us suppose that the pair falls back to 1.2475. Here it is essential for a trader to have some stop loss level in mind to limit losses, otherwise, this trade can easily turn into a bottomless hole and lead to serious losses.

There are also similar examples when it comes to the second chart as well. It might happen that GBP/USD falls to 1.2400, triggering all 3 buy orders. However, instead of sticking to the range trading, Pound can break down and fall to $1.2300 and even lower. So if a trader does not have a Stop Loss order in place or alternatively does not close the trade manually, then losses can add up and eventually all of those 3 positions could be wiped out.

Therefore, just like with any other trading strategies, a trader must be able to cut his or her losses if things do not turn out the way it was planned.

Avoiding trading commissions

The Grid trading strategy might be very helpful for Forex traders, however, there are some other factors to keep in mind. It might be worthwhile to point out that this style of trading involves opening and closing several positions within a rather short timeframe. Therefore, if a trader uses a trading account that has commissions for opening each position, those expenses can quickly add up and take out a considerable portion of the potential payout amount.

There are some accounts, where traders are charged from $5 to $10 for an opening position for 1 lot, meaning 100,000 units of currency. One upside with those brokers is that the spreads with currencies can be much lower, compared to other ones. So potentially they might be very useful for long term trading. However, for the grid strategy, this might not be the best option.

Returning to our previous examples, if traders are charged $30 to $60 for executing those trades, then this can potentially offset most of their gains. Therefore, if a trader is considering using grid strategies, then it is essential to find brokers with no commissions.

Luckily, there is no shortage of companies who offer their Forex services with those terms. For example, both of Axiory’s standard and Max accounts have no fixed commissions.

Forex Grid Strategy Basics - Key Takeaways

The grid trading strategy in Forex focuses on putting a buy and sell orders above and below the current market price, using predetermined intervals. The actual number of orders and distance between them can be adjusted according to the trader’s preferences.

Traders do not need great forecasting skills in order to trade Forex using a grid strategy. It is essentially an automated system, designed to capitalize on usual market volatility.

Trading Forex with the grid strategy can be profitable both in the trending and ranging markets. However, each of those scenarios require a different approach.

FAQ: Grid Trading Strategy for Forex

How compatible is a grid trading strategy to scalping and day trading?

When it comes to scalping methods, combining it with a successful grid trading strategy can be challenging since the former is mostly focused on 1 to 15-minute trades. The latter usually have larger time frames because of several numbers of buy and sell orders.

As for day trading, it can be perfectly compatible with grid strategies. In fact, a day trader can adopt this method for regular use. However, one thing to keep in mind here is that most professionals with this trading style prefer to close all positions before markets close.

What are some of the most common mistakes people make, when they trade with Forex grid strategies?

One very common mistake traders make is not closing winning trades on time. If the market moves are favorable, buy or sell orders are triggered and everything basically goes according to the plan, this does not mean that those gains are already secured. Traders have to close those positions to lock in those payouts. If that's not the case, then the market can change direction, wipe out all of those gains and leave them with losing trades.

The second mistake, which is closely related to the first, is not using Stop Loss orders or at least closing positions manually when the market moves against the trader. In this case, the losses could really add up and potentially can be very devastating for one's trading account.

A third very common error is using very high leverage. Depending upon the situation, this in some cases can force the closure of positions before all orders are triggered can also lead to serious losses.

Finally, some traders do not pay attention to the commission structure of Forex brokers. As a result, they might employ a good grid strategy Forex approach, but those kinds of expenses can significantly reduce their payouts and make this method much less effective.

Can the Grid strategies be used with large intervals?

The Grid trading strategy for Forex traders is not designed only for short term trades, it can be used for large timeframes. Therefore instead of 10 pip intervals, as mentioned in our previous example, a trader might decide to use 20 or 50 pip distance between the buy and sell orders. In fact, some long term professional Forex traders even go as far as to use 100 pip intervals for their grid strategy.

Therefore the number of buy and sell orders, as well as distance between them can be customized and adjusted according to personal preferences.

Are some currency pairs more useful for Grid strategies than others?

Generally speaking, the Grid trading strategies can be applied to any currency pair. However, there are some exceptions. For example, this method might be completely useless in case of EUR/DKK, since the Danish krone is pegged to the Euro with a very tight band around the 7.45 mark for at least 18 years.

There are also some currency pairs that are not operating under a fixed exchange rate regime but are still less volatile because of frequent central bank interventions and other factors. For example, quite often EUR/CHF experiences little variation. In fact, the average daily volatility during the last 52 weeks was well within 55 to 60 pip range. So theoretically one can use grid strategy here as well, however, in practical terms, it might be potentially less profitable.

Therefore we can conclude this method could be most effective with the high volatile currency pairs since large variations in the exchange rates are more likely to trigger buy or sell orders eventually letting a trader make significant gains. Therefore such highly volatile pairs as GBP/JPY, EUR/AUD, EUR/NZD, GBP/CAD, GBP/AUD, and GBP/NZD could be potentially very compatible with Forex grid strategy.

Can the Grid strategy be used in conjunction with Bollinger bands?

Analyzing Bollinger bands can be very helpful for grid methods for several reasons. Firstly, the distance between the upper and lower bands and their direction can potentially give a trader valuable clues about whether a trend is developing or the market is settling for a range. For example, flat outer bands could signify range trading conditions, while narrower outer lines could be a notable sign of lower volatility. Obviously the opposite is also true.

Bollinger bands can also give a trader some idea about potential support and resistance points for a given currency pair. This, in turn, can help him or her to select appropriate levels for buy and sell orders.

Finally, a trader can use the Bollinger band analysis to determine the potential trend reversals. For example, if the market sport price crosses the middle, Simple Moving Average line, then this can be a sign of trend change. Just like in the previous case this can help a trader with grid strategy.

It might be helpful to point out that when it comes to Forex grid strategies, the actual size of intervals between buy and sell orders do not have to be fixed. A trader can choose different distances between those orders, in accordance with support and resistance levels or other technical indicators.