Grid trading is considered one of the most common crypto trading tactics among those who do not wish to trade manually. However, it is pretty simple to automate and can provide substantial returns under the right market circumstances. In this article, let’s learn more about this idea.
What is Grid Trading?
Grid trading is one of the type of trading that involves putting in a series of purchase and sell orders around a predetermined price at regular intervals. In this way, a commerce grid is formed.
Grid trading performs best in a competitive market with frequent price changes. By automatically executing low buy orders that result in high sell orders, it ensures profitability each time the selling price exceeds the purchase price during a lateral price movement, nullifying the requirement for market forecasting.
Working of a grid trading
For instance, a trader may set a lower limit of $59,000 and an upper limit of $61,000 if the price of Bitcoin (BTC) is $60,000. Their “grid” is the region that lies between these two limitations. A purchase order is carried out when the price reaches $59,000, and a sell order is carried out when it reaches $61,000. Traders can set several buys and sell orders at various locations in their grids.
A trader must manually choose one lower limit and one upper limit for each grid trade. The trading bot automatically executes these orders at predetermined price intervals. They can set as many more orders as they like, but they must have at least one purchase order and one sell order inside the grid.
The potential for profit increases with the size of the difference between the lower and upper limits. For instance, if a trader places a purchase order at $60,000 and a sell order at $65,000, the trader will make more money when the upper limit is set to $61,000.
Advantages of grid trading
Grid trading is well-liked among crypto traders because it can be automated and enables traders to make money in sideways markets. Grid trading has several advantages, including:
After manually establishing trade limits, such as grid buy/sell orders, trading bots execute transactions on your behalf. As a result, trading bots operate around the clock, and traders can gain profit without personally monitoring price fluctuations.
- Profitability in sideways markets
Grid trading enables traders to make money when there is no evident trend in the market. This strategy takes advantage of the sideways price movements that frequently occur for months at a time in the crypto market.
- Grid density options
A trader can specify many automated buy/sell limit orders. As a result, they can decrease their risk and increase their chances of profit.
Tips for grid trading
Deciding on a reasonable pricing range is key to making sure your plan is profitable. This suggests that you must be highly selective about the appropriate market circumstances for your approach to prevent being on the wrong side of a trending market.
You must make sure that the appropriate risk management measures are in play. Therefore, to prevent losses brought on by market swings, you must choose a proper leverage ratio and create suitable take-profit and stop-loss orders. For instance, if a sell order is put, a stop loss should be above the top of the price range, and if a purchase order is placed, it should be below the bottom of the price range.
Finally, ensure that the grid trading criteria you choose are appropriate for the current market circumstances. In range-bound markets, limit orders made outside the range are less likely to be filled, resulting in missed opportunities. The grid trading criteria can be changed in real-time to reflect the current state of the market.
Grid trading is fully controlled by code and is unaffected by human emotions. By comprehending market dynamics, grid trading will place orders at prices that gradually rise and fall in an effort to profit from market volatility. As a result of the market’s price discrepancy, individual investors will benefit.
The strategy works best when there are minimal price changes and a sideways market. This method may be highly beneficial if a trader stays updated on the news and changes the layout of their grid every day.