What is Grid Trading and How to Use It?

What is Grid Trading

As a 24/7 trading market, it’s unrealistic for investors to track the market behavior around the clock in the cryptocurrency market. Thus quantitative trading and program systematic trading have natural advantages in this market. To help investors better seize the opportunities, we will briefly introduce one of the commonly used quantitative trading strategies–grid trading.

Grid trading is a stable, safe, and profitable trading method that does not fluctuate dramatically. Used in traditional finance for many years, it refers to placing a certain number of orders above and below a set price, to guarantee profits in selling high and buying low. 

The same applies to the cryptocurrency world where the market is always volatile. That is, with the constant price fluctuation of digital assets, it automatically buys low and sells high within a trading range, and continuously makes profits.

Why Make Use of Grid Trading

The grid trading strategy is like a fisherman fishing. Setting up grids at different prices, wait to fish–buy in the digital asset when the price goes down and sell out when it rises. Traders can get a return in every buy-in and sell-out as long as the price fluctuates within a certain range.

Why does it work actively in the cryptocurrency market? 

1. Multi-Currencies and Trading Pairs

One of the greatest advantages is that it supports various cryptocurrencies and trading pairs on different exchanges. A single trading pair can run several grids together and multiple trading pairs can run tens of grid strategies simultaneously.

2. Unintermittent Operation

It supports long-term trading, 24/7 hours available, and helps to catch trading opportunities. 

3. Continuous Profits from Volatility

There is always severe volatility in the cryptocurrency market with strong amplitude. As the grid trading strategy is profitable from price fluctuations, the more ups and downs, the more fish it can net. 

4. Relatively Lower Risks

Compared with arbitrage trading, grid trading can help inexperienced traders avoid frequently chasing ups and selling into corrections. In addition, its position holdings are decentralized, which can prevent buying all at one time from being deeply stuck.

5. Perfect Programmatic System

Grid trading strategy has a well-designed programmatic trading system. It is suitable as it can assist high-frequency trading with a clear rule, better than manual tracking all day long.

According to statistics, the digital asset market is in a state of turbulence 70%-80% of the time within a year, seeing only a 20-30 percent of unilateral trend. The basic principle of grid trading is to divide digital assets into several price levels. The program automatically places orders based on defined parameters at set prices where the market fluctuates, selling high and buying low, and continuously generating profits.

Therefore, the greater volatility is, the higher profits grid trading makes.

Besides, grid trading can prevent emotional and panic selling at a loss, which may lead to great economic disasters. From the perspective of long-term trading, it has obvious advantages and is possible to obtain a 10%-15% yield.

Which Cryptocurrency Should I Choose

No matter what kind of trading, the first step to get started is to choose the right asset/product. There are several factors that need to pay attention to in grid trading: 

Good volatility. Choose a cryptocurrency that’s volatile recently but not greatly. Since grid trading prefers continuous market fluctuations, the more volatile the market, the higher the yield. On the basis of grid trading, if a K-line shows an obvious fluctuation, it’s time to apply the strategy.

Good liquidity. The mainstream digital assets that always perform well and have a large trading volume are good choices. Traders can choose from the top ten cryptocurrencies by market capitalization.

How to Set the Price Range

The significance of the price range is to avoid the unrestricted buying or selling of cryptocurrencies when a unilateral market trend occurs. In this case, traders will suffer heavy losses. 

The determination of the price range is related to the amplitude of the digital assets in the recent period. 

For mainstream currencies, such as BTC, ETH, etc., the general price range usually sets at 90%-110% of the current price. Under normal circumstances, the daily fluctuation will not exceed 10%. Even if it exceeds 10%, there is still room for going back to the original range.

How to Set the Grid Density

The grid density is the size of every grid. The denser the grid, the slighter fluctuation it can catch, and the larger profit it can make, but the greater the amount of capital it requires. 

At the same time, it is closely related to the upper and lower intervals of the grid and the transaction fee. A dense grid will have frequent transaction behaviors, thus profits generated from every transaction might be inadequate to cover the transaction fee, causing a loss. Whereas a wide grid will execute fewer transactions, making a relatively low profit. 

Investors need to divide the price fluctuation range of a cryptocurrency into a number of price levels based on the volatility of this asset. The programmatic system will allocate funds at each price level to place a buy order. 

In a real trading operation, when the price of a cryptocurrency drops, it immediately places a sell order at a higher price after a buy order is filled. That is, buying at low corresponds to selling at high. On the contrary, when the price rises, it immediately places a buy order at a lower price after a sell order is executed.

How to Use Grid Strategy in Futures Trading

Its rule of thumb is that position control is more important than timing. The grid trading strategy is a technique that places a certain number of sell or buy orders at regular intervals above and below a set price to target gains instead of stopping loss. When a position’s market price meets a predefined target and records a gain upon closing, it places the same number of buy or sell orders above and below a set price again. This creates a fishing net-like grid of orders for gaining profits back and forth in the fluctuating market.

Position Control

It is plain from the above that grid trading strategy’s core is to achieve profitability based on the concept of “mean reversion”. Grid trading strategy applies very well to price fluctuations. A difference between every arbitrage trading pair is subject to “regression” in nature. For example, a futures contract’s price is eventually subject to regression to its spot price, and so does the price of perpetual contracts. Therefore, grid trading strategy and arbitrage trading are considered twins in the coin market.

Take a long grid as an example:

We place a long order once the market price moves one interval lower. When the market price falls, we open 3 long positions at Buy 1, Buy 2 and Buy 3 in order (i.e. Buy 1, Buy 2 and Buy 3 shown above, representing the opening of 30 long perpetual contracts and 30 short quarterly contracts); and when the market price rebounds, we cover positions at Cover 3, Cover 2 and Cover 1 in order (i.e. Cover 1, Cover 2 and Cover 3 shown above, representing the covering of 30 long perpetual contracts and 30 short quarterly contracts). The profit is calculated as 3*price of one interval. This is also the case for the short grid.

In short, the risks involved in grid trading strategies are very small. Having a better understanding of the strategy, you can lock in profits without observing price fluctuations. At the same time, the transaction fees of low and medium-frequency grid transactions are generally lower than those of high-frequency grid transactions. Even if you are not familiar with programming, you can do it manually.

Set Take-Profit & Stop-Loss

The setting of the take-profit and stop-loss price also needs to consider. Choose the grid density based on market fluctuations, and determine the take-profit and stop-loss interval. When the price is rising, it is appropriate to expand the take-profit and stop-loss range, while in the process of a decline, it needs to narrow the stop-loss range.

Take-profit is used when the market sees a unilateral trend, such as a constant price increase of a cryptocurrency. Once it breaks a support level, it is likely to continue to rise. Not wanting to miss the opportunity, traders set a take-profit price, and buy-in when the market price reaches this price.

Stop-loss refers to setting a stop-loss price and selling out when the token price falls to this price, or even continuously drops below the support level, in order to reduce the loss.

Risk Warning

As a trading tool, grid trading should not be regarded as financial or investment advice from Bexplus. If a unilateral market trend emerges and goes away from your price range due to an unreasonable grid setting, Bexplus is not liable for any loss. You can readjust the grid strategy timely according to the current market performance.

Grid trading is used at your discretion and your own risk. Bexplus does not undertake any responsibility for any losses caused by grid trading in futures contracts. It is recommended to understand the grid trading operations and make rational decisions.

Leveraged futures trading is a trading activity involving high risks. While it may bring great gains, it may also lead to huge losses. Severe price fluctuations may force a liquidation in your entire margin balance. Please evaluate your risk tolerance before entering the real market.

Bexplus offers a simulated trading system to help traders familiarize themselves with the rules before making a real trade. Click here to start the simulated trading with your grid trading strategy.