How do Forex Grids Work?
Do you like to drive fast cars, base jump or play with volatility? Then as a trader forex grids might be a technique that will get your adrenaline pumping.
A forex grid is an instrument used in the grid trading technique that takes advantage of normal price volatility through the placement of buy and sell orders at regular intervals, and around a set base price. The grid is created by these buy and sell orders, which are usually spaced at 10- or 15-pip intervals.
Forex grid trading has gained popularity mainly due to its most basic advantage of low forecast requirements. Traders need very little forecasting of the market directions and can even automate trading conveniently.
Pure and Modified Grids
Grid trading for forex is done with two types of grids, pure and modified.
- Pure Grids
These function on the assumption that it is the gridded range itself that will hold together and that it is natural for the market to trade sideways 80% of the time and to trend only 20% of the time. When the market trades sideways, the attendant profits are hit hard, since both the buy and sell limits are repeatedly executed.
Grid advocates argue that there is sufficient fluctuation within the trend to blow off repeat profits. A pure grid system has little to do with market direction as it positions its buy and sell limits at systematically spaced intervals and each has a specific price. Advocates of a pure grid systems often try to locate a market that is stuck in a range and that range is then gridded. Buy (long) trades are placed at the bottom half of the range, while sell (short) trades are at the top. This spreads the leg intervals and target profits at an equal distance from each other through the entire range.
- Modified Grids
Unlike pure grids, modified grids are influenced by market direction. This system regulates its first entry with indicators that index the market direction and strength. Using these, it goes about gridding the entry with multiple buy limit orders that are equal in size and spacing, beneath the initial buy. The same is followed for sell limit orders, which are then placed above the initial sell, evenly and equally.
Understanding Forex Grid Trading Strategy
When beginning with forex grid trading, the first thing to learn is how to execute the system properly. Start with brushing up on the market’s current dynamics, the way it works and all its foundational fundamentals. What you can save some effort on is the pain of positioning the trades manually to make your grid.
You can establish automatic forex grid trading systems to do away with the grid making process altogether. Besides reducing the effort you put into the setup, it also eliminates the job of predicting the market’s direction and makes your choice simpler. Basically, once you have a working setup, all you need to know is when the market is going to make a move and your strategy will manage the rest.
Grid trading is basically a play on the volatility of any market and is a convenient choice for forex traders who work in volatile markets with undefined trends.
If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Trading leveraged products involves a high level of risk. You may lose more than your invested capital.