If you’re not familiar with the grid trading strategy in forex trading, it is quite a clever one to add to the way you navigate your profit-making in the stock market. The beauty of this technique is that you can easily automate it in the same way that you automate a stop loss. It also requires less work trying to gather data and create accurate forecasts based on any number of factors. The grid trading technique takes advantage of incidents when the market is moving up and down rather wildly in uncertain times.
When you anticipate how a price is going to move, at some point you will gain – that is the cornerstone of trading. Although gains are not assured, you will make a profit at those times when you have accurately bet on a price movement. Using the grid trading technique, your goal is to base your results on the spike or fall in prices, and it is best to have two trading accounts.
Who should use this strategy?
This strategy can work in a CFD context as well, but it is not for new or beginner traders. It is for those who are fairly advanced, confident and tenacious. You should learn how to trade CFDs, gain a thorough understanding of all techniques, and build up your portfolio, expertise and planning capabilities before attempting this.
If you’re new, attempt it in theory while you learn all the fundamentals of trading and other main strategies in general. Doing this on paper while you grow in experience gives you an edge in the sense that it won’t be entirely foreign to you by the time you are at a level that allows you to trade using this strategy. This technique is simple, but deceptively so. Throw CFDs into the mix, and the risks are much higher than normal, but so is the reward. You also need reserve funds.
How it works
The basic formula informing this technique is that you place your orders above existing values and have an idea of what the price will be at the time you want to sell. You will then sell below the expected price.
For example, you set prices for a stock that was valued at 4.13 at about 4.14, 4.15, and 4.16. Using the grid trading concept, you sell for 4.10, 4.11 or 4.12. You lost money in the beginning, but over time, you’re going to gain this back and profit. As the prices steadily climb up, you may end up selling at 4.21.
The forex market – and you, the broker in it – will then “catch profits”, as it is termed, as the market continually handles transactions. You will only do this if you have factored in a long enough period of time in which to catch profits falling through the grid.
What to avoid
You want to avoid being stuck in an indefinite open position. You may notice another trader’s profit-taking roll and wait for the market to swing in your favor. However, this may force you to stay where you are for a long time, and you might even have to top up the funds in your account. If you give up prematurely, you may not recover your losses.
Why is it attractive?
You are almost guaranteed profits at some point because the market does not stop moving up and down. The forex industry loves this concept as it relates to the fundamental strategy of placing orders differently. If you have enough funds, this may even become your go-to strategy over time.