- Grid trading is a trading strategy that involves setting predetermined prices for buy-and-sell orders, which are automatically executed.
- It can be suitable for different crypto market environments, from trending to sideways.
- Grid trading is already widely used in forex trading, the largest financial market in the world by trading volume, making it a battle-tested trading strategy.
What Is Grid Trading?
Grid trading is a systematic (i.e., rules-based and automated) trading strategy suitable for different types of market environments, such as markets that are trending in one direction or moving in a sideways range.
Grid trading involves setting multiple predetermined price levels to which buy or sell orders are automatically executed when the price touches such levels.
Since it is a systematic strategy, crypto grid trading does not involve human judgement, except when setting the initial predetermined price levels. Once the price levels are set, crypto grid trading bots provided by crypto trading platforms perform the tasks, and the trader can sit back and let the strategy run itself.
Learn more about the Grid Trading Bot on the Crypto.com Exchange here.
Examples of How Grid Trading Works
In Sideways Markets
To set up the grid, the trader first needs to decide on a reference price. In the above example of a sideways market, buy orders should be set below the reference price. Each buy order has a corresponding sell order set at levels (in this case, two levels) above the buy orders. Visually, the price levels resemble gridlines on a grid; hence, the name grid trading.
The distance between each price level (gridline) is typically set to be the same. The trader also sets a maximum price level that no sell orders will be executed above, and a minimum price level that no buy orders will be executed below.
In Uptrending Markets
In the above example of an uptrending market, buy orders are set above the reference price. Each buy order has a corresponding sell order set at levels (in this case, one level) above the buy orders. The trader also sets a maximum price level that no buy orders will be executed at or above.
In Downtrending Markets
In the above example of a downtrending market, short-sell orders are set below the reference price. Each short-sell order has a corresponding order to close the short-sell position set at levels (in this case, one level) below the short-sell orders. The trader also sets a minimum price that no short-sell orders will be executed at or below.
The above are general examples of how grid trading strategies are typically deployed. Traders should use their own configuration depending on their personal preferences, since grid trading tools (or Grid Trading Bots) provided by the different crypto trading platforms vary in applying grid trading strategies.
Advantages of Grid Trading
Relatively Simple Application
Grid trading only requires price as the input, unlike fundamental analysis, which requires continual deep dives into and monitoring of sector dynamics, valuations, growth drivers, financial projections, quality of teams, and much more. Moreover, once the appropriate price levels have been initially set, the strategy theoretically runs itself without involvement from the trader, and there is no need to constantly monitor the market.
Users can set many, or just a few, price levels in the grid, depending on their personal preferences and circumstances. Grid trading can also be combined with other trading strategies; technical analysis is one of the most common. Users can consider combining their knowledge of technical support and resistance levels, and use trend lines as a reference for where to set the price levels in the grid.
Grid trading is a strategy that is suitable for different types of market environments, whether trending or stuck in a sideways range. However, users should be aware that markets are great servers of humble pie: They may morph quickly and without warning, so it is a good idea to combine some risk-management tactics (described below) with the grid trading strategy.
Battle-Tested in the Largest Financial Trading Arena in the World
Traders have long been using grid trading in the forex market. The forex market is the largest financial market in the world, with a daily trading volume of US$6.6 trillion, making it even larger than the stock market. Grid trading is therefore a tried-and-true strategy that users can consider deploying in their participation in crypto markets.
Conquers a Trader’s Worst Enemy: Themselves
Trading can be a high-stress endeavour, and emotions can lead to suboptimal trading decisions. The main benefit of grid trading is that, since it is systematic, human judgement and emotion are taken out of the picture.
The numerous cognitive biases that investors exhibit are well documented in academic behavioural finance studies. Behavioural finance has such a significant impact on investing that the US Securities Exchange Commission (SEC) dedicates staff to it; the topic is also an important part of the Chartered Financial Analyst (CFA) exam. Some of the common cognitive biases identified include:
- Herd behaviour: Investors tend to copy the behaviours of the majority of other market participants. This sometimes shows up as a fear of missing out (‘FOMO’).
- Confirmation bias: Investors have a bias towards seeking out and accepting new information that agrees with the investment beliefs they already hold.
- Loss aversion: Investors tend to feel worse from losses compared to pleasure from gains, even if the losses and gains are of the same monetary amount.
- Recency bias: Investors tend to place more importance on recent occurrences when making investment decisions.
- Anchoring bias: Investors have a bias towards an arbitrary benchmark or reference point that is irrelevant to rational investment decisions.
Deploying a systematic strategy like grid trading helps to avoid these cognitive biases by enabling the trader to avoid their worst enemy — themselves. Some of the largest and most successful hedge funds in the world — such as Ray Dalio’s Bridgewater, Man Group, AQR, Two Sigma, and of course Jim Simons’ legendary Renaissance Technologies — have been known to use systematic trading strategies.
Learn more about the behavioural psychology that influences traders.
Fortify the Grid
Users can optimise their grid trading strategy by adding risk-management tactics like stop-losses, a hedge grid, and position sizing. Since the market may not move in the way that the grid was initially set up to take advantage of, risk management helps to mitigate losses stemming from this.
Markets are fickle and may not move in the way the grid was initially set up to work best in. For example, consider a situation where the grid was initially set up to trade in a sideways market; buy orders were executed, and subsequently, the market went on a sustained downward trend without hitting the sell-order levels that were placed above the buy orders.
The trader would unfortunately then be sitting on losses that could potentially increase if the market continues falling. Setting stop-losses, by automatically selling the position after a certain amount of loss occurs, could help to minimise or control losses.
Hedge Grid Trading
A hedge grid trading strategy places both long- and short-sell orders inside the same grid. This enables the strategy to potentially profit no matter whether the price rises or falls. For example, in a falling market, if the profits from the short positions exceed the losses from the long positions, then the overall result is a gain.
Sizing positions properly can help to minimise losses to a trader’s overall portfolio even if some individual positions are loss-making. A simple way to position size is to make sure each individual trade is only a small percentage of the overall portfolio (i.e., don’t put all your eggs in one basket).
Start Using Crypto Grid Trading With Crypto.com Exchange’s Grid Trading Bot
Grid Trading Bots are available in the Crypto.com Exchange.
Users can use Auto mode to set up a Grid Trading Bot in seconds or fine-tune the parameters for their bot with Advanced mode. This applies to all trading pairs in the Crypto.com Exchange, including popular ones like ETH/USDT, BTC/USDT, and ETH/BTC.
Users can simply navigate to any of the following pages in the Crypto.com Exchange to create a Grid Trading Bot for the spot market:
The best part? Users won’t incur any additional fees or charges for using the Grid Trading Bot. An unlimited number of Grid Trading Bots can be created on the desktop and mobile web versions of the Crypto.com Exchange.
Due Diligence and Do Your Own Research
All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, cyber-security, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.
Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.