Gridtrading Ebook 2nd 5b4b4f0700b52 e

Licensed to: tanyan.huang@163.
com: Order ID 14242 on Jul 15, 2018

Legal Notice
This work is registered with the UK copyright protection service and is protected under international
copyright law.
Copyright © 2018 Forexop.com. All rights reserved.
No part of this work may be reproduced in any form, or by any means without the written permission
of the Publisher. This book is licensed for your personal use only. You may print a copy of this book
for your own personal use. You must not circulate this book or any part of it in any format.
Thank you for respecting the work of the Author and Publishers.
Limitation of Liability/Disclaimer of Warranty
This book represents the views and opinions of the Authors and is for general information only. It
does not constitute financial advice, investment advice or other professional advice.
While the Publishers and Authors have used their best effort in preparing this book they make no
representations or warranties with respect to the accuracy or completeness of the material within and
disclaim any implied warranties or suitability for any particular purpose.
Forex, CFDs, options and other leveraged products carry a high degree of risk. They are not suitable
for all investors. Always obtain independent financial advice before investing in any financial product
to ensure such investment is suitable for your particular circumstances.
All performance given in relation to our software and/or strategies must be regarded as hypothetical.
Hypothetical performance has inherent limitations and can significantly over estimate returns that
could be achieved compared to real investment. Hypothetical returns are also made with the benefit of
hindsight. Hypothetical returns are made without risk and market limitations such as liquidity
constraints.
Numerous factors can influence real investment returns and these cannot be accounted for in any
hypothetical system. All of these factors can adversely affect real trading performances.
Past performance of any trading system or methodology is not indicative of future returns.
By reading this book, you assume all risks associated with using the advice given, with a full
understanding that you, solely, are responsible for anything that may occur as a result of putting this
information into action in any way, and regardless of your interpretation of the advice. In no event
will we be liable for any loss or damage including without limitation, indirect or consequential loss or
damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in
connection with, the use of the materials provided here.
Acknowledgements
We acknowledge and are grateful to MetaQuotes Software Corp™ for use of their trading tools
and charting package.
Licensed to: tanyan.huang@163.com: Order ID 14242 on Jul 15, 2018

Contents
1. Introduction to Grid Trading .............................................................................................. 6
What is Grid Trading? ............................................................................................................ 6
Unit Cost Averaging............................................................................................................... 7
Case Study 1: USD/JPY ..................................................................................................... 8
Profiting from Trends ....................................................................................................... 10
Profit Expectation: The Central Limit Theorem............................................................... 11
Grid Trading and FIFO ........................................................................................................ 12
2. Choosing a Grid Strategy ................................................................................................. 14
Grid Types ............................................................................................................................ 14
Price Dependent Grids ......................................................................................................... 14
Example ............................................................................................................................ 15
Dynamic stop losses ...................................................................................................... 15
Hedging the grid ........................................................................................................... 16
Time Dependent Grids ......................................................................................................... 16
3. Grid Trading Strategies .................................................................................................... 18
Classic Hedged Grid System ................................................................................................ 18
Grid Configuration – EUR/USD Case Study ................................................................... 18
The Grid Profit Outcomes ................................................................................................ 19
When to Start the Grid...................................................................................................... 20
When to “Close” the Grid ................................................................................................. 21
Managing Risk .................................................................................................................. 21
Simulations ....................................................................................................................... 22
Simulation #1 ................................................................................................................ 22
Simulation #2 ................................................................................................................ 23

Inverted Hedged Grid ....................................................................................................... 23
Inverted hedged grid: Profit outcomes .......................................................................... 24
The Bi-Directional Grid ....................................................................................................... 26
EURUSD Dual Grid Configuration .................................................................................. 26
The Dual Grid – In Action ................................................................................................ 27
Risk Control with the Dual Grid Strategy..................................................................... 28
Test Results....................................................................................................................... 29
Simulation #1 ................................................................................................................ 29
Simulation #2 ................................................................................................................ 30
Advantages and Disadvantages of the Dual Strategy ....................................................... 31
Understanding Hedged Grid Payoffs ................................................................................... 32
Trade management ........................................................................................................ 33
Calculating the Grid PL .................................................................................................... 34
The Time Dependent Grids .................................................................................................. 35
The Basic Time Axis Grid Concept ................................................................................. 36
Basic Concept ................................................................................................................... 36
Why Trending Opportunities are Missed ......................................................................... 37
Time-Axis Grid: Case Study ............................................................................................ 37
Risk/return tradeoff ....................................................................................................... 38
Setting the grid time interval......................................................................................... 38
Variations.......................................................................................................................... 39
Mean divergence optimization ...................................................................................... 39
Fibonacci timezones...................................................................................................... 39
The Fibo Fan Technique ............................................................................................... 41
When the trend reverses ................................................................................................ 42

When to Use This Strategy ............................................................................................... 43
Pros and Cons of Grid Systems ............................................................................................ 43
The strengths are: .......................................................................................................... 43
The weaknesses are: ...................................................................................................... 43
4. Resources .......................................................................................................................... 44
Excel sheets .......................................................................................................................... 44
Metatrader tools.................................................................................................................... 44

1. Introduction to Grid Trading
Grid trading is a trading style but it also underlies several important trading strategies. In this
book I will cover both the fundamental reasons for using grid trading as well as some of the
main strategies.
If you’re new to grid trading then one thing you should know is that it has received a bit of
bad press over the past few years. Unfortunately much of this has been down to account
managers and signal providers who’ve used it as a way of increasing their client’s turnover
and hence their own profits.
I’ll argue that there are good and bad reasons for using a grid trading approach. Good reasons
are hedging, risk balancing and unit cost averaging. Bad reasons include creating account
churn and multiplying exposure.
What I’ll attempt to do is explain the reasons for and against this trading style and dispel
some of the myths. Hopefully from this you can use your own judgement as to when and
where to use this technique.
Common statements about grid trading:
 Grid trading is reckless

 You need special software
 It requires high leverage
 It ties up capital
 It results in big drawdowns
 It results in higher brokerage fees
While a few of the statements above have some truth I will show that most are myths and are
in fact down to poor trading practices. These are not necessarily related to the strategy being
used.
I’ll give some practical examples of grid trading setups, and explain under what conditions
grids work as well as their weaknesses. There are also a number of resources that you might
want to use to develop your own grid strategy. These are listed at the end.
What is Grid Trading?

The basic idea of grid trading is very straightforward. Instead of placing one trade, the grid
trader places a sequence of trades that work as a group. The position of the trade entry points
forms a grid pattern which is where the name comes from. Once placed, the trader usually
manages the group of trades as a single system.
Usually grid trades are entered as “stop” or “limit” orders around the current price level – but
not always. I’ll explain this in more detail later on, but that’s the basic idea.
Figure 1-1 shows a simple grid trade arrangement.

Figure 1-1: A basic 4 x 0.25 grid trade
Here the trader enters the market with 4 separate trades.
The first reaction to the above is usually “why not just place one trade”? This can be
answered in one word: Volatility. If there were no volatility at all in a market, there would be
no real benefit in a grid trading approach.
Grid trading is a play on market volatility. There are two reasons why traders choose to use
the technique.
Firstly, many grid strategies don’t “require” you to predict the market direction at a certain
instant. If you’ve traded before you’ll know that predicting short term market direction is
extremely difficult.
Secondly grids can work well in volatile markets, where there is no clear trend or
direction – these conditions are very common in the currency markets.
These points will be explained in more detail below.
Unit Cost Averaging

Grid trading works best as an averaging tool, when you spread your entry prices and risk.
Traders originally used the method to spread their risk across a group of trades, albeit trades
in the same direction.
The main reason for this is that most financial markets are volatile and therefore there’s
always an element of random or unpredictable price movement.
Professionals in the finance industry have long known that trying to time the markets is a
fool’s game - unless you have insider knowledge that is. They know that splitting a large
block order into smaller units is the optimum way to enter the market. This doesn’t just work
for big orders. It also makes sense for smaller trade sizes.

Rather than having your entire position placed in one block, in most cases it’s better to say
divide it among 10 smaller units each with different entry points. As well as being a trading
style, a grid approach can be seen simply as prudent money management.
Grid trading is only helpful if you use it in the correct way. If a trader uses it simply to scale
up trade volumes, it has no benefit at all, and will actually just overweight a risky position as
I show later.
To profit from any grid trading technique, it is important to understand the strengths as well
as the weaknesses. You also need to know which setup works in which markets.
When developing a plan, the first thing to understand is that no matter how many trades your
grid has, once in place it effectively works as one position.
That is, if you have a group of trades, each with different open prices, there will be an
average price. The profit or loss (P&L) on your grid is exactly the same, as a single trade with
the average entry price of the grid.
You might say at this point why even use a grid, when it just seems to make things more
complicated?
The main reason is unit cost averaging. This is best explained with the help of an example.
Case Study 1: USD/JPY
The Block Trader
Let’s say a trader has identified the start of what he thinks is a bullish trend in USD/JPY. He
normally places single “block trades” of size 4 lots. The maximum amount he wants to risk
on this trade is 4 lots x 50 pips/lot. Thus his total effective drawdown limit will be 200 pips.
At the current market price of 102.50 he will need to put a stop at 102.00. Therefore the
trader places a buy to open market order for 4 lots at 102.50 with stop at 102.
The trade sequence is shown in Figure 1-2.

Figure 1-2: Grid trader versus single block trader.
After a few hours, the market falls to 102.0. At this point, the position of 4 lots closes on
hitting the stop loss. The result to the block trader is a loss of 200 pips.
The block trader’s book is as follows
Price Order Size (Lots) P/L (pips)

102.50 Buy Open 4 0
102.00 Sell Close 4 -200
The Grid Trader
Now let’s look at the grid trader. The grid trader has seen the same bullish trend in USD/JPY.
He is using a time-axis grid. With this grid system, orders will “hit the market” at fixed time
intervals, regardless of the price level. The grid will have a maximum of four trades, and the
size of each will be 1 lot.
The grid trader uses the same stop loss and risk as the block trader. He will close the entire
grid if the total loss is 200 pips or more, regardless of the P/L on any individual trade. Note
that though his maximum overall risk is the same as the block trader, he will spread this risk
across four trades.
With the same price movement as above, the grid trader’s book is as follows:
Price Order Size (lots) Holding (Lots) Avg. Entry P/L (pips)
102.50 Buy Open 1 1 102.50 0.00
102.00 - - 1 102.50 -50.00
102.30 Buy Open 1 2 102.40 -20.00
102.50 Buy Open 1 3 102.43 20.00
102.90 Buy Open 1 4 102.55 140.00
103.25 Sell Close 4 0 102.55 280.00
What we see from the table is that the grid trader’s entry prices average over the trend. Some
trades execute at high price levels, some at low price levels. The second row shows the
maximum drawdown at 102.00 (the point that the block trader exits).

Notice that unlike the block trader, when the market draws down to 102.00 after the first
trade, the loss on the grid is only 50 pips. This is because the grid trader is not yet fully
committed to the trend.
In the next few ticks the market rises, and the next three trades execute. This means the grid
achieves an average entry price of 102.55 which is spread across 4 trades.
The point to note here is that timing the market was less critical for the grid trader. He only
needed to spot the trend. The block trader finished with a loss of 200 pips. Because he was
fully committed from the start, his position stopped out early on the first drawdown of just 50
pips.
On the other hand the grid trader finishes with a profit of 280 pips, with no more risk.
At trade 4, which is the final buy order at 102.90, the grid trader has a margin, or stop
distance of 85 pips. The stop distance is the amount of fall the position can withstand. If the
market immediately fell by 85 pips, the grid would close at a loss of 200 pips.
The grid trader needs to calculate the stop distance after each trade such that the total loss
never exceeds 200 pips. See table below.
Trade Price Avg. Entry Grid Stop Level Stop Distance (Pips)
1 102.50 102.50 100.50 200.00
2 102.30 102.40 101.40 100.00
3 102.50 102.43 101.83 66.67
4 102.90 102.55 102.05 85.00
In other words even when fully committed the grid trader’s drawdown limit is 70% greater
than that of the block trader for the same amount risk. The block trader had to exit after a
drawdown of just 50 pips whereas the grid trader could withstand a fall of 85 pips.
This case study shows an example where the market benefited the grid trader. Of course there
could be situations where the block trader made the right call, timed the market exactly and
made a bigger profit than the grid trader. This choice is a trade-off between risk and reward.
Profiting from Trends
Most traders are good at spotting trends in financial charts. Even novices. Yet despite this
very few are able to profit from them. The reason for this is that normal market volatility
usually shakes them out long before they’ve had chance to make any profit.
In the above case study we saw how the grid trader was able to capitalize on unit cost
averaging. In practice this “smooths out” the volatility of the market and makes it more likely
that the trader can ride the rising (or falling) trend. But there’s also another advantage in
splitting the entry, and that is in the amount of commitment.
Taking the above example, let’s see what happens when the trend temporarily goes into
reverse. In this case, for the grid trader the stop distance reduces with each trade because the
grid is now opening positions against the trend, or into a falling market.

Trade Price Avg. Entry Grid Stop Level Stop Distance (Pips) P/L (Pips)
1 102.50 102.50 100.50 200.00 0.00
2 102.30 102.40 101.40 90.00 -20.00
3 101.98 102.26 101.59 38.67 -84.00
4 101.62 102.10 101.60 2.00 -192.00
Unlike the block trader, the grid trader is not fully committed until the final trade is placed.
The grid trader has the option to close at any point before opening further trades. If he closed
the grid, before trades 3 or 4 the loss would be 20 pips or 84 pips respectively.
On the other hand the block trader would still have been stopped when the market fell to 102
with the same loss of 200 pips.
If the grid trader chose to continue buying into a falling trend, the last trade would see the
stop distance just 2 pips away from the spot price. This is the compromise that the trader
makes for averaging as opposed to hedging entry at a single market price.
Profit Expectation: The Central Limit Theorem
People unfamiliar with grid trading often point out that it’s not possible to increase your long
term returns just by splitting your trades. While this statement has some truth, it misses an
important point. To see why, consider the following.
Let’s suppose we set up two experiments. In the first, we have a blind “block” trader who has
an allocation of 10,000 lots to trade over a one year period. In the second we have a “blind”
grid trader who has the same allocation of lots. Call these trader A and trader B respectively.
The only difference between the two is that the grid trader will trade multiples of 1 lot. The
block trader will trade in multiples of 10 lots per position.
The term “blind” means that the traders have the same abilities and insights. We’ll also make
sure that they are trading in the same market and other than their trading style all other factors
are the same.
If you measured the outcomes for these two traders what you would find is that their expected
profits are identical. However what is different is the distribution or variability of those
profits.
If this all seems a bit theoretical, stick with me because there is a very important point behind
this.

Figure 1-3: Distribution of returns which shows risk of the block trade
Now suppose we clustered each week’s profits for the two traders and plotted them on a
graph. It would look like Figure 1-3 above. The circles represent the weekly profits of trader
A. The squares represent the profits of trader B.
If you did this experiment many times over you’d find that the weekly returns for the two
traders would roughly “line up” with the normal curves shown in Figure 1-3. This is due to
the central limit theorem.
Even though the expected returns for the two traders are the same, this is only of theoretical
relevance. In the real world, where stop outs and margin calls exist the actual profits of each
of the two traders will be very different.
Trader A is far more likely to suffer a margin call and stop out because his returns are
scattered further apart than those of Trader B. In other words, Trader A is placing more “eggs
in his basket” with each of his trades. Trader B on the other hand is splitting each trade into
smaller units. Therefore each of his weekly returns is more likely to approach his expected
average.
This means there’s less divergence from his true capability and he’s therefore less a victim of
the market’s volatility.
The point to take from this analysis is this. When trading with a single position there is a
higher risk of entering at the wrong points. In other words, mistiming the market. Over time
this means it’s statistically more likely that the block trader will reach a point where he’s
unable to recover from those losses.
This is why professional traders are taught from early on to avoid trading in big blocks where
possible. A valuable case study on this is the Turtle Trading experiment.
Grid Trading and FIFO

In 2009 the, US National Futures Association (NFA) put a ruling in place that’s commonly
referred to as the FIFO ruling. If you’re a resident in the U.S. or your broker is U.S regulated
then there’s a good chance that this ruling affects you.
What does it mean? FIFO restricts the use of offsetting transactions or hedge trades. In a
nutshell the FIFO ruling means that if you have multiple positions open in the same security
and of the same size, then those positions have to be closed on a first-in-first-out basis.
This ruling can affect any strategies that open multiple positions in the same currency, and
that includes certain grid strategies.
With most of the grid strategies described here the grid is closed as a single system. This
means the FIFO rule is never an issue because it’s always possible to order the closures from
oldest to newest.
With the hedged grid and more complex grid setups there are cases where you’d want to
close trades in a different order and that can conflict with FIFO. The easiest way around this
is to modify the strategy to use different positions sizes. This avoids any transactions being
paired as “hedge trades” and therefore avoids them being subject to FIFO.
When you try to close trades out of order you will typically see in an error if your broker is
FIFO compliant. Rulings can change so it’s always prudent to check with your broker to see
what is permitted.

2. Choosing a Grid Strategy
When deciding on a grid setup, there are few options to weigh up. That’s what we’ll examine
next.
Grid Types
Grid strategies come in two basic flavors: time-dependent or price-dependent. With a price-
dependent grid, the approach which is most often used by speculative traders, trades are
executed when the market reaches certain price levels. With a time-dependent grid, trades
execute at certain points in time - that is along vertical lines in the price chart.
Grid flavors:
 Price-dependent
 Time-dependent
There’s also a further classification which relates to the trading direction of the grid:
 Trending grid: Trades are opened in the direction of the trend

 Anti-trending grid: Trades are opened against the trend
As we’ll see later as a general rule, trending strategies work best in lower volatility markets.
Grids that trade against the trend generally work better in volatile markets.
Price Dependent Grids

With a price-dependent grid, trades open as the market strikes certain price levels. In the
simplest scenario these are horizontal price levels in the chart. With more complex strategies
the positions are opened according to a variety of technical criteria. This can be for example
when the price reaches certain positions within a trading channel.
Figure 2-1: Price dependent (horizontal) grid

The trading decisions can either be:
 Fixed: Fixed levels are bound when the grid starts

 Deterministic: Entry is determined from indicators
Example
Say we want to set up a grid on EUR/USD and the price is currently at 1.3500. To start, our
order book would look like this:
Level Order Size (lots) Entry

1 Buy Stop 0.25 1.3515
2 Buy Stop 0.25 1.3530
3 Buy Stop 0.25 1.3545
4 Buy Stop 0.25 1.3560
To create the grid, I’ve used an interval (leg) size of 15 pips and 4 grid levels. For the order,
I’ve used “buy stop”. The buy-stop orders are triggered if the price moves above the entry
level. So we will trade into the trend with this grid.
Because this is a very simple grid and I have used a fixed interval, we can already determine
from the outset that if all trades open, the average entry price achieved will be 1.3538. With
all trades open, the grid is profitable at any point above 1.3538 and makes a loss at any point
below.
Dynamic stop losses
Notice I have not entered individual stop losses for any trade in the above example. In
general with this approach, traders treat the grid as a single entity rather than managing the
trades individually.
Let’s say, my overall risk for this setup is 50 pips. I will close the entire grid if the net P/L on
the entire grid falls below 50 pips.
Suppose my maximum risk on 1 lot is 50 pips and I set a 50 pip stop loss on each trade (0.25
lots) to give a max loss of 50 pips.
If the first trades opens, and price fell 55 pips before rallying, I’d be stopped out of the first
trade. But because I only had one trade open, my loss was just:
0.25 x 50 pips = 12.5 pips
If I wanted to keep the risk on the entire grid constant (at 50 pips) I would need to manage the
stop losses dynamically. See table below.
# Trade Lots Open lots Trade SL Grid Risk (pips)

1 0.25 0.25 200.0 50
2 0.25 0.50 100.0 50
3 0.25 0.75 66.7 50

4 0.25 1.00 50.0 50
This way, the risk on the grid remains constant, regardless of the number of open trades. So
when we have just one trade open, we can set the stop loss to 200. The benefit of this is that
we can withstand a higher degree of volatility or spread widening without taking any more
risk.
With 3 trades open, it’s reduced to 66.7, and with four open, the stop becomes 50 pips on
each trade. With all four trades open, we are fully committed and then effectively block
trading with a stop 50 pips away and an entry price of 1.3538.
Dynamic stops are easy to calculate and set if you are using automation. You just trigger a
market order to close when the price reaches your stop level. Manually, it means you have to
reset the stops each time a new trade is opened to keep the grid risk the same.
If you’re trading manually the easiest way to keep track of everything and do the calculations
is with an Excel spreadsheet or by using a custom indicator for your platform.
Tip: With any trading system it is always advisable to set broker-side safety stop losses, just
in case for whatever reason dynamic stops don’t work. This may happen for example if the
market gaps through the price or if your software fails. Having wide broker side stop losses
acts as a failsafe and should not interfere with the operation of the grid.
Hedging the grid
As an alternative to the above, we could set up the grid into a hedge arrangement. With this
setup, the grid will lock-in at a certain loss if price reverses. The hedged grid has two
opposing sets of trades, usually placed either side of the start level. When price rises above
the start we initiate buy orders, when it descends below we will initiate sell orders. It trades
into the trend. This is explained more fully in Chapter 3.
Time Dependent Grids

The second type is known as the time-dependent grid. These systems are commonly used by
stock traders and asset managers where market entry is staggered over a period of time.
Typically with this type of grid there isn’t a great deal of analysis of the market activity once
the starting point is set. The trades trigger at certain time intervals. These can be set to:
 Certain times during the day

 Equidistant time intervals
 Fibonacci time zones
The diagram in Figure 2-2 shows the concept.

Figure 2-2: Time dependent (vertical) grid

3. Grid Trading Strategies
Classic Hedged Grid System
With a “hedged grid” the system is made up of both long and short positions. As the name
suggests, there’s a degree of inbuilt hedging – or protection with this approach. The basic
idea is that any losing trades can be offset by the profitable ones. Ideally, at some point the
entire system of trades becomes positive. We would then close out any remaining positions
and the profit is realized.
With this grid strategy the ideal scenario is that the price moves back and forth across one
side of the grid. In doing so it executes as many of the orders and passes as many of the take
profit levels on one half as possible.
It’s precisely this reason that the hedged grid works best in “choppy” markets without a clear
trend. However, it can still be profitable in a trending market. I’ll get onto that in a minute.
The hedged grid is a market neutral strategy. The profit will be exactly the same whether the
market rises or falls. That is, with this style of trading you don’t need to predict either a
bearish or bullish trend. However if your set up is right, you can still profit in either a bearish
or bullish rally.
Let’s have a look at a basic grid configuration.
Grid Configuration – EUR/USD Case Study

Say we want to set up a hedged grid on EUR/USD and the price is currently at 1.3500. To
start, our order book would look like this:
Level Order Lots Entry Level Order Lots Entry Hedge

1 Buy Stop 0.25 1.3515 -4 Sell Stop 0.25 1.3440 -75
I have used the same interval between trades; though this is not strictly necessary.
The buy-stop orders are triggered if the price moves above the entry level, while the sell-
stop orders are triggered if the price moves below the entry level. So we always trade into
the trend with this grid strategy.
As the table shows, the trade pairs in the grid hedge each other. Once both sides of a trade
pair are open, their P/L becomes “locked-in” at the hedge amount. When all trades are open,
the hedged grid reaches its maximum loss and the P/L is fixed at that point.
The table above shows how this works. For example, trades at level 1 and -4 act as each
other’s stop loss. They hedge each other. The lowest P/L happens when price passes both

levels, causing both sides to open. This would lock in a loss of -75 pips. Once both are open
the trade pair is effectively cancelled out of the grid.
How do you achieve a profit? A profit is achieved if only one side of each pair opens. This
happens for example when the price trends in the same direction without all of the opposing
hedge trades opening.
It is actually quite rare in practice for all levels to be struck (unless they are very close). What
usually happens is that some drawdown will cause a knock-out a few of the hedge pairs, but
the prevailing trend carries on so that the higher levels are struck and thus the grid achieves a
profit.
Taking each of the sets of trades together, this particular hedged grid has a maximum loss:
Lots x Trades/2 x hedge = 0.25 x 4 x ( -75) = 75 pips
With this type of grid you are also free to increase or decrease the number of trades as
required, and change the interval and take profits to anything you like. But remember
increasing the leg size and adding more levels will increase the maximum loss.
You can set the strike levels using pivot grids or other support/resistance indicators including
range finders. However remember that the above profit formula only applies when the grid
levels are equidistant.
Finally one important point is that once both sides of the hedge pair are struck out, the loss on
that pair is then fixed. Because of this, in most cases the trader will not trigger the hedging
side of the trade. What happens in practice is that once the price strikes the opposing grid
level, that pair is knocked out of the system. This is done by closing the first and cancelling
the opposing hedge trade.
This doesn’t make any difference to the profit outcome of the grid but it does result in lower
transaction costs because unnecessary trades are avoided.
The Grid Profit Outcomes
In the example above if the price were to move in a straight line up 60 pips it would execute
all of the buy orders, and none of the sell orders. So we’d finish with a profit of 90 pips (45 +
30 + 15). Likewise, if the price moved straight down 60 pips, we’d have all sell orders
execute and we’d again end up with a profit of 90 pips.
What would more likely happen though is that the price will swing up and down causing
some of our buy and sell orders to execute at different points. Say for example the price dips
below 1.3500 and the first one of our sell orders executes.
Now what happens if we get a reversal and a bullish rally? Let’s say the price increases
enough to hit the level for the last buy order in the grid. That’s 1.3560. So our P&L looks like
this:
Level Order Entry P/L Level Order Entry P/L

1 Buy Stop 1.3515 45 -4 Sell Stop 1.3440 0
4 Buy Stop 1.3560 0 -1 Sell Stop 1.3485 -75
The P&L for the trade pairs at level 4/-1 are now locked-in since both are open. But we can
still profit on the remaining three buy orders.
The profit/loss scenarios are shown in the diagram in Figure 3-1 below. The diagrams show
the maximum and minimum payoffs for the grid under different price movements.
Figure 3-1: Hedged grid maximum and minimum payoffs
When to Start the Grid

The classic hedged grid is market neutral meaning it doesn’t make any difference whether the
market rises or falls. The grid can still profit. But this doesn’t mean the decision when to start
the grid is random.
The hedged grid is a form of straddle trade. Simulations over thousands of test cases have
shown that the hedged grid is most profitable in directional markets with low to medium
volatility. In other words, the best time to start the grid is when a sharp directional move is
expected but where you don’t necessarily know in which direction that move will be.
Examples of trigger events I use for the hedge grid include:
 A volatility squeeze
 An upcoming news release
 Testing of key support/resistance levels
 Trading range boundaries
Examples of entry indicators I use:
Range finder
Pivot calculator

When to “Close” the Grid
To keep things simple, I prefer to close out the entire grid once the sum of trades has reached
my chosen profit level. In the grid above, the maximum loss is 300 pips x 0.25 lots.
We could have say 350 pips as a target profit and leave the grid to run its course.
Alternatively for a higher win ratio but lower profit we could exit when the profit reaches 100
pips.
Which choice you make is down to your own account management, leverage, and target trade
durations and so on. It won’t necessarily be a disadvantage if your profit target is lower than
your maximum loss. It will just give you a different payoff profile – more frequent, but lower
value wins.
One of the benefits of treating the grid as a single system is that it makes for simple trade
management.
As explained above with this hedged configuration, the ideal outcome is for the price to reach
the levels on either the top or bottom half of the grid, but not both. So if the price trends in
one direction, you then have to consider if a reversal is likely which would “take back” your
profit.
Another choice would be to dynamically close out trade pairs once they reach a certain profit
target.
The advantage of this is that you can potentially reach a higher profit target by running your
profits. The disadvantage though is that you will have to wait an unknown time for the trades
to run their course. And this ties up your capital and margin in your account.
Implementation wise, once a level is “knocked-out” the order on the opposing level would
normally be cancelled. This avoids the unnecessary cost (in spread and swap fees) of having
two opposing trades open at once when the profit outcome is fixed.
For example, say the buy at level 1 opens, then the price falls back to 1.3440 and the sell
order at level -4 is reached. The open “buy” would then be closed, and the sell order
cancelled.
Managing Risk
As explained our maximum loss for this grid setup is 300x0.25 pips. This occurs when the
price reaches all levels and the entire grid is opened. However remember that the grid’s
upside profit potential is unlimited.
With the hedged grid, the downside risk is always limited provided all trade pairs are kept in
place. However, if non-opposing trade pairs are closed independently of one another, this can
cause the system to become unhedged and can cause run-away losses.
In runaway markets or in currencies with low liquidity, your trades may not execute exactly
at your grid levels. This can leave you with much greater exposure than planned.

It is also essential as part of the grid setup to have a clear idea of the likely market range so
that your exit levels are set appropriately.
Simulations
If you’re going to use this method, I’d encourage you to test out as many set ups as possible.
This will give you a feel for how it works. You can download our Excel spreadsheets at
Forexop.com and try out any number of scenarios and under different market conditions (see
below).
The Excel workbook uses a highly realistic price data model, so you can be sure the results
are as “real” as you can get.
The Metatrader strategy tester is also useful. But the advantage of simulated data over “back
testing” is that you can generate an infinite number of scenarios. As well as simulate different
levels of volatility and bullish or bearish trends. This will allow you to generate an accurate
probability distribution of likely returns.
You can also use our trading simulator to practice grid trading setups.
Simulation #1
The first simulation shows a near ideal test case. The price initially increases triggering all of
our buy orders. I’ve marked the order levels on the chart with solid lines. Those above 1.3500
are buy stop orders, those below are sell stop orders. That is they trade into the prevailing
trend. See Figure 3-2.
Figure 3-2: Hedge grid test case #1
None of the sell orders were reached as the price remained in the top half and reached only
those levels. Our grid ended up with the following profit:
Order Entry Limit O C Net Order Entry Limit O C Net

Buy 1.3515 1.3865 Y N 71.1 Sell 1.3485 1.3135 N N 0
Buy 1.3530 1.3880 Y N 56.1 Sell 1.3470 1.3120 N N 0
Buy 1.3545 1.3895 Y N 41.1 Sell 1.3455 1.3105 N N 0

Buy 1.3560 1.3910 Y N 26.1 Sell 1.3440 1.3090 N N 0
P&L Pips 194.6 0
The columns O and C denote if the trade was opened and closed during the run.
Simulation #2
This next simulation demonstrates the worst case. In this run, the price action is very choppy
and manages to reach all of the levels on the grid (see Figure 3-3). The final P&L is -316
pips. The maximum loss of the grid was 300 pips. The additional 16 pip loss was due to the
spreads.
Figure 3-3: Worst case scenario where price crosses all levels

Buy 1.3515 1.3865 Y N 145.5 Sell 1.3485 1.3135 Y N -179.5
Buy 1.3530 1.3880 Y N 130.5 Sell 1.3470 1.3120 Y N -194.5
Buy 1.3545 1.3895 Y N 115.5 Sell 1.3455 1.3105 Y N -209.5
Buy 1.3560 1.3910 Y N 100.5 Sell 1.3440 1.3090 Y N -224.5
P&L -316 Pips 492.2 -808.2
In very choppy markets, when all levels are likely to be hit, the reverse strategy – the “inverse
hedged” grid, which is explained below is generally the better choice.
Also for trending markets an alternative option is to use a time-dependent grid which
aggregates the price to capitalize on trend movement.
Inverted Hedged Grid
An inverted hedged grid is a hedged grid in reverse. It has an exactly opposite profit profile.

The inverted hedged grid has the property that it locks in a fixed maximum profit when all
trades are opened. It has an unlimited loss that happens when the price moves through one
side of the grid only. Thus it is the exact mirror of the hedged grid.
The inverted grid is an anti-trending strategy. That is it trades against the trend.
The table below explains.
Level Order Lots Entry Level Order Lots Entry Max P/L
1 Sell Limit 0.25 1.3515 -4 Buy Limit 0.25 1.3440 75
The sell limit orders trigger when the market rises above the entry price. The buy limit orders
will execute when price descends below the entry. Therefore, the system buys in a falling
market and sells in a rising market.
Once all trades are open, the inverted grid achieves its maximum profit. In this example it’s
75 pips because I sized the lots so that the sum total was 1 lot.
The profit outcomes for this strategy are the opposite of the hedged grid. See Figure 3-4.
Inverted hedged grid: Profit outcomes
Figure 3-4: Maximum and minimum profits for the inverted hedged grid
Note also that unlike the hedged grid, the inverted hedged grid has the potential to lose an
unlimited amount.
Generally, the hedged grid works better in lower volatility markets. The inverted hedged grid
works better in higher volatility directionless markets.
This is due to the fact that in high volatility settings, trend reversals happen frequently which
thwarts the trend follower but plays to the strength of the counter trend system. When the
volatility is high, there’s higher chance of the price striking all levels in the grid, so locking in
a maximum profit.

By contrast in a directional market, it’s more likely that the price will cross just one side of
the grid and not the other. Figure 3-5 illustrates this relationship between volatility and the
probability of the grid achieving profit.
Figure 3-5: Relationship between grid profits and volatility

The Bi-Directional Grid
The “dual grid system” is a variation on the hedged grid theme. The basic difference between
this strategy and the hedged grid described above is that we place both buy/sell grid legs at
each level but in different directions. It can be thought of as a series of straddle trades.
In its basic form the dual grid is equivalent to using the hedge grid and an inverted hedge grid
together.
This means we are both long and short at the same point. So with the dual grid, at each leg
we have one position trading into the trend and the other position which is opened against the
trend. This configuration is known as a bi-directional.
A bi-directional grid requires more complex trade management than does the hedged grid
simply because there is more going on. If the two sides of the grid overlap exactly, the system
can only profit where one side of the grid is switched off and the other kept on.
This may seem a bit counter intuitive, but in choppy, volatile markets, the strategy can be
highly effective.
As with the hedged grid forex traders like this strategy because it’s market neutral. That
means we don’t need to forecast the way in which the market is going to move. This is one of
the key advantages of this approach.
One important difference between this and the hedged grid is that this method can lose if
there’s a strong rally on the down or upside.
There is an amount of inbuilt hedging from the offsetting positions. But even so we still need
to carefully control the losing trades in a strongly trending market to prevent heavy
drawdown. See the scenarios below for more on this.
Let’s have a look at an example to see how the grid works in practice. I’ve created an Excel
spreadsheet to do the calculations. This will allow analysis and fine tuning of the strategy to
get a better idea of how it works.
EURUSD Dual Grid Configuration
Suppose we have EUR/USD trading at 1.3500. To start the grid at this point, my order book
would be as follows:
Order Entry Take Profit Order Entry Take Profit

Buy Stop 1.3562 1.3587 Sell Limit 1.3558 1.3533
Buy Market 1.3502 1.3527 Sell Market 1.3498 1.3473
Buy Limit 1.3487 1.3512 Sell Stop 1.3483 1.3458

Order Entry Take Profit Order Entry Take Profit
If you look diagonally at the table above you’ll recognize that the diagonal down and to the
right is a hedged grid. The diagonal up and to the left is an inverted hedged grid.
The trades at the same level are the straddle trades. For example:
This marks one straddle pair. To illustrate I haven’t placed a gap between them, other than
the spread. But in practice most traders would place a gap between each pair of straddle
trades even if this is just a few pips.
If we traded the above grid, when one side is in profit, the other would be in loss and vice
versa. This is because the system is an exact mirror with trades opening at the same grid
levels.
There are several ways to trade with this system. One involves managing the two grids as two
separate systems of trades. Each side has its own profit target and stop loss.
The second option uses a swing strategy, and involves managing trade pairs individually.
This can work if volatile, whipsaw price action is expected. In this case, profit targets are set
on each trade pair. In the case above, I’ve used an interval of 15 pips and a take profit of 25
pips, with a 4 pip spread.
Experimentation is the key to success with this strategy: Some set ups work better than others
for given market conditions.
The Dual Grid – In Action

Taking the above example the buy market and sell market trades start off the dual grid
system. We can execute these orders immediately as they’re already at our current market
price level. So from then, on the long side our stop orders execute when the market rises
above the current level. These are trading into the trend. Our buy limit orders execute if the
market goes below the current level. These open against the trend.

Figure 3-6: Chart showing dual grid buy/sell legs open and closes.
The converse happens with our sell orders. The sell limit order triggers when the market
rises, and our sell stops trigger if the market falls. See Figure 3-6 for how this plays out in a
typical situation.
The table below shows the profit outcomes for 10 runs with two different stop losses and
without stop-losses.
Simulation Result (10) SL=80 TP=50 SL=40 TP=50 No SL

Total profit (pips) 184.1 1373.3 -838
Average per run 18.41 137.3 -83.8
Here I ran 10 simulations of the strategy, first with SL/TP, and then without. I also included a
cut-off so if the grid fell below -600 pips, I closed all positions.
Obviously this is just a narrow test with a few different settings. The chapter below offers a
more extensive test.
If you want to try your own scenarios you can use our Excel grid workbooks which can be
found at the website. The workbook generates all price data – you just need to enter in your
trading set up and press F9 to run the scenario.
Risk Control with the Dual Grid Strategy
With a dual grid, risk management as well as trade management is easier when the two grids
are treated as separate systems.
The deterministic profit and loss outcome helps in deciding if one side of the grid should be
closed, either at a take profit point or at a stop loss. And, because the two grids are the
“inverse” of one another, markets conditions where one side profits, will usually cause the
other side to suffer and vice versa.
My preferred option is to have a profit target and maximum stop level for the two sides. I
close out once the profit target is reached on one side, regardless of the P&L of the individual

trades. Likewise, I have a stop loss for the group – usually about 2/3 the target profit, and
close it if it’s exceeded.
When managing the trades individually, the question comes as to where to place the stops and
take profits. As this method doesn’t “assume” any prior forecast on market direction, we
shouldn’t assume any better than average odds of a single trade ending up in profit, given
that it opens. Actually it’s slightly less than this because of the spread, but to keep things
simple let’s just assume it is 50:50.
Whipsaw price movements will often make “at the money trades” flip between profit and loss
within minutes or seconds.
If your stop losses are too tight, there’s a higher probability of the price crossing the stop
thresholds too quickly, and the trade ending up in loss. This is simply because the stop loss is
a nearer threshold to cross. In this case more of your trade pairs will get taken out by “market
noise” before either of them reach their profit levels.
But each trade pair is hedged up until the point one side is closed. So if your stop losses are
much wider than your take profit, this can mean a higher percentage of your trades end up in
profit simply from swings in the market. The downside of course is that your profit per trade
will be lower.
When doing this, it’s a good idea to keep tabs on your overall grid P/L to keep drawdowns to
manageable levels. Your average entry rates can be calculated iteratively each time a new
trade is opened. From these you can calculate the P/L at any point.
Wider stop losses can work because when the losing side is closed, the other half will be in
profit. The ideal is then that the price reverses and a net profit can be achieved for the trade
pair when the second half is closed.
Basic money management means taking these things into consideration and deciding how
much can be risked per trade, and limiting the maximum loss on the entire system. There
certainly isn’t a one size fits all solution. It will depend on your risk tolerance, account size,
leverage and so on.
For more on the relationship between stop losses and profit outcomes see my article on the
website. There’s also a handy Metatrader tool that will do the calculations for you and tell
you what your win ratio will be for a given take profit/stop loss. Or it will do the reverse and
tell you where to place the stops/take profits to achieve a target return.
Test Results
Simulation #1
I started each run at price level 1.3500. A take profit target of 100 pips was set on each trade.
No stop loss was used on individual trades but as before I placed a stop on the entire system
at 600 pips.
My first run of the strategy gave a positive result. As can be seen from the chart in Figure 3-7,
the price bobs up and down across most of the grid levels in the top half, and we achieved 2

take-profits on the trades. The others ended with mixed profits and losses. Overall the net
profit was 185.1 pips.
Figure 3-7: Favorable results, where the price swings across the top area of the grid.
Order Entry TP OC Net Order Entry TP O C Net

Buy stop 1.3560 1.3660 Y N -30.1 Sell limit 1.3560 1.3460 Y N 30.1
Buy stop 1.3545 1.3645 Y N -15.1 Sell limit 1.3545 1.3445 Y N 15.1
Buy stop 1.3530 1.3630 Y Y 100.0 Sell limit 1.3530 1.3430 Y N 0.1
Buy stop 1.3515 1.3615 Y Y 100.0 Sell limit 1.3515 1.3415 Y N -14.9
Buy limit 1.3485 1.3585 N N 0.0 Sell stop 1.3485 1.3385 N N 0.0
Net P&L 185.1 Pips 154.9 30.3
Simulation #2
Here’s a good example of where trending can ruin profits in a dual grid strategy. In this run,
the buy orders at the top of the grid were executed. But the profit on these long positions was
offset by the short positions on both sides of the grid. So the overall loss was -658 pips in this
case.
The chart for the run is shown in Figure 3-8.

Figure 3-8: Negative scenario with trending conditions, and fewer swings.

Buy limit 1.3485 1.3585 Y Y 100.0 Sell stop 1.3485 1.3385 Y N -242.2
Buy limit 1.3470 1.3570 Y Y 100.0 Sell stop 1.3470 1.3370 Y N -257.2
Net P&L -658 pips 600.0 -1258.0
Advantages and Disadvantages of the Dual Strategy
 On the plus side you don’t need to be able to forecast which way the market will move.
 It works well in volatile, predominantly sideways markets.
 Can be highly effective under right conditions – especially rapid price swings across the
grid.
 It is relatively simple to automate the strategy and to calculate the overall grid profit and
loss.
 On the negative side it has higher overhead. It requires more complex trade management
than using either of the grid methods described above.
 Because of the hedging, the dual grid doesn’t work well when there are strong directional
trends and fewer price swings.
 It can result in heavy losses if the take profit and stop loss levels are not carefully
managed.

Understanding Hedged Grid Payoffs
Hedged grid: As I mentioned above this is essentially a trend follower. Trades are opened in
the direction of the trend. This configuration works well when the market makes a single,
directional movement either upwards or downwards.
With this method you can also get away with a move in the opposing direction, provided it
doesn’t reach all of your levels opposing the trend. With this setup, the opposing grid levels
act as stop losses. So having all your grid levels triggered would effectively cause you to be
stopped out. The grid has a fixed downside limit, but an unlimited upside.
Inverted Hedged Grid: This configuration trades against the trend. That is, it buys in a
falling market, and sells in a rising market. This setup can work well when volatility is high
and whipsaw price action is expected. This grid has a limited upside, but an unlimited
downside risk.
The diagram below illustrates how the two strategies are related to one another.
Figure 3-9: Opposing grid configurations: hedged (up), verses inverted hedge (down).
The hedged system reaches its maximum loss when all trades within the grid execute. By
contrast when all trades in the inverted hedged grid execute, the system reaches its maximum
profit potential. In both cases, the profit/loss is locked in once all trades in the grid are open.
See the table below.
Grid level Pip offset Single down P/L Single up P/L

3 30 Sell 90 Buy -90
2 20 Sell 80 Buy -80
1 10 Sell 70 Buy -70
-1 -10 Buy -50 Sell 50
-2 -20 Buy -40 Sell 40
-3 -30 Buy -30 Sell 30
Total P/L 120 -120

The table shows P/L “lock-in” when all trades are open.
Basically, a rule of thumb for trading with these grids is this: If high volatility is
expected, use the inverted hedged grid. Otherwise use the hedged grid.
The inverted grid is a clear winner in highly volatile situations. This is because it reaches its
maximum profit potential when the price whips through the grid at all levels and all orders
are executed.
Dual grid: One other option is to run the two grids simultaneously to create a dual system as
I described above. With this setup, it’s necessary to manage the two grids separately. That
means managing the overall stops and take profits on both sides.
The idea is when one system is in profit, it’s closed out, with the hope that the market will
reverse and push the other side of the grid into profit or at least to give an overall net profit.
This can be useful under certain conditions, but the trade management is more involved.
Trade management
When using a grid wide stop losses should be put in for good measure. Though the best way
to handle a grid is to manage the entire system as one unit – rather than worry about the P/L
of individual trades. With the single up grid, closing trades separately is risky because it can
leave you unhedged.
The most efficient way to work is to have an overall stop loss and take profit target for the
grid. At either of those points, all trades are closed and the profit or loss is realized.
This makes the trade management easier. It just means watching two numbers. The average
entry rates on your buy and sell side.
The average entry rate is updated iteratively each time a level on the grid is reached and a
new trade is executed:
Avgn+1 = ( Lotsn x Avgn + Price x (Lotsn+1 – Lotsn)) / Lotsn+1
From these numbers you can quickly work out the P/L for the entire grid. The table below
shows an example:
Trade # Lots Lots Open Price Avg

1 1 1 1.1500 1.1500
2 1 2 1.1502 1.1501
3 1 3 1.1497 1.1499
4 1 4 1.1494 1.1498
5 1 5 1.1489 1.1496
For example at trade #5

Avg5 = { Lots4 x Avg4 + Price x (Lots5-Lots4) } / Lots5
= { 4 x 1.1498 + 1.1489 x (5-4) } / 5
= 1.1496
If you have a lot of trades open this is a quick and easy way to keep track of your average
entry price.
Having a simple trade management system means you have the option to run either or both
grids by hand. Or have a manual overlay if you’re using and expert advisor.
Calculating the Grid PL

The hedged grid has a fixed downside risk. This is set by the number of grid levels used, and
the interval between each of those levels.
To work out the P/L with equidistant levels use the following:
Maximum loss =-(1+L) x L x S

Maximum gain - unlimited
Where L is the number of grid levels on both sides, and S is the gap in pips between each
level.
The inverted hedged grid, which is the reverse, has:
Maximum gain = (1+L) x L x S

Maximum loss - unlimited
So in the example above, a hedged grid with 3 levels above and below the start point, and a
gap of 10 pips, has a maximum potential loss of:
-4 x3 x 10 = -120 pips (loss)
Also +120 pips would be the maximum gain with the inverted hedged grid with the same
setup.
To find the long term expected returns from these strategies I ran an extensive simulation of
four million iterations. This simulation varied the parameters of the grid and measured the
profit/loss in each case for both grid types and under varying market conditions.
The results are shown in Figure 3-10 and Figure 3-11.

Figure 3-10: Long term performance of hedged grid:
normal volatility vs. high volatility.
Figure 3-11: Long term performance chart of inverse hedged grid:

normal volatility vs. high volatility.
The two graphs above show the accumulated profit/loss in pips for each of the runs. These
represent the long-term likely profit distributions for each grid, with both high and normal
volatility markets.
The simulations confirm the fact that the inverse hedged grid is the better performer when the
market is volatile.
The Time Dependent Grids

The Basic Time Axis Grid Concept
All of the grid strategies I’ve talked about so far have been those that enter the market on
movements on the price axis. We call these horizontal or price dependent grids.
There is another class of grid that traders use which are known as time dependent grids.
Also known as vertical grids, these involve placing trades at intervals on the time axis rather
than the price axis. Like most other grids this is a play on a unit cost averaging however this
approach takes things one step further.
Basic Concept
The argument goes as follows: Proponents of the vertical grid strategy argue that trying to
time the market by optimizing price entry points is futile. They argue that the market
essentially does a random walk (at least on the short time horizon). This randomness means
that it is impossible to predict short-term price movements in any reliable way.
Instead of trying to time the market at an exact instant, with a time-dependent grid the trade
block is spit into equal sized units and drip-fed at time intervals into the market. This is a
strategy that’s frequently used by asset managers in buying stocks and other securities.
So let’s say we want take a long position and will use a size of 1 standard lot. Using a vertical
grid with 5 levels, the trade block is split up into 5 chunks each of size 0.2 lots. We then enter
the market at set time intervals with 5 trades each of size 0.2 lots. Figure 3-12 demonstrates.
Figure 3-12: Vertical grid system
The 5 trades enter at different points or market levels. Some may be at a higher price, some
lower. Overall, the entry price will approximate the average over the time period chosen. The
finer we split the trade block, the more closely the average entry price will converge to the
average price over that time period.
After opening the grid, once the price deviates from the average line (in the direction of the
trade), the grid is closed at a profit. Importantly the grid trader does not care if one or two
trades are in loss, provided the entire system is in profit: the principle of averaging.

Why Trending Opportunities are Missed
Trends are very commonplace in currency markets on all timescales. As I said above many
traders find it near impossible to profit from strong bullish or bearish runs. The main reason
for this is that market volatility will cause positions to be “stopped out” before a profit is
reached.
In a trend, the entry timing of the trade is critical in that the trader wants to avoid entering just
prior to a temporary correction. In forex and futures markets this problem is compounded
because traders often use high leverage and as such cannot withstand a deep drawdown in the
trend.
A time-axis grid gets around this problem because it virtually guarantees that overall you will
enter the market close to the average. If the moving average is rising (or falling in a
downward trend) the profits should then follow.
Time-Axis Grid: Case Study
Suppose we see a rising trend, and decide to take a long position to profit from the upward
move. To capture the trend we can use a time-axis (aggregating) grid. This will consist of six
trades each of volume 0.2 lots (total 1.2 lots). The trades are spaced at equal time intervals;
that is an equal number of time ticks apart.
The order book is shown in the table below.
Time Bid Ask Order Volume Price Avg. Entry P/L (pips)
T0 1.0111 1.0113 Buy open 0.2 1.0113 1.0113 -2.0
T1 1.0382 1.0384 Buy open 0.2 1.0384 1.0249 133.5
T2 1.0212 1.0214 Buy open 0.2 1.0214 1.0237 -25.0
T3 1.0102 1.0104 Buy open 0.2 1.0104 1.0204 -101.8
T4 1.0158 1.0160 Buy open 0.2 1.0160 1.0195 -37.0
T5 1.0226 1.0228 Buy open 0.2 1.0228 1.0201 25.5
T6 1.0352 1.0354 – – - 1.0201 151.5
T7 1.0406 1.0408 Sell close 1.20 1.0406 1.0201 205.5
Figure 3-13 shows the price chart plotted against the moving average. The green shaded area
shows the profit region and the red/brown shaded area the loss region. The important thing to
note is that with each trade the average entry price of the grid system converges closer to the
moving price average.

Figure 3-13: Forex timed grid setup
In a rising trend we are then assured of entering close to the average. When the price line
rises above the moving average and profit threshold (at T7) the entire grid is closed with a
profit of 205.5 pips.
Risk/return tradeoff
So why not buy once when the price is exactly at the moving average line? This would
achieve nearly the same P/L as the grid. This is true but the difference is that it would not
give the same degree of flexibility. The grid trader is not fully committed until placing the
final trade in the set. On the other hand, the trader entering with a single block is fully
committed from the start.
This is a tradeoff in terms of risk versus profit. If the price suddenly rallied before the grid is
fully open, the grid trader loses potential profit. Whereas the reverse case is also true. If the
price plummets after some bad economic news, the grid trader can abandon the position
before being fully committed, thus taking a smaller loss.
Setting the grid time interval
Note also that the time span of your trade entries must be of the same order as the trend you
are trading. For example, suppose you were aiming to profit from a trend on the hourly chart.
Using a grid with five trades each at five-minute time intervals would be of no use at all. This
would only average over a twenty-five minute period.
The span of the grid entries needs to be comparable to the cycle of the trend. So if you are
trying to capture a trend on the 1-hour chart for example, your trade entries really need to
span several hours.
First, decide how many trades you want the grid to have. Let’s say you usually trade in single
standard lots. You could split this block into 10 equally sized units each of 0.1 lots. Now if
you want to capture profit over a two-day cycle in the trend say, your trade entries need to
span at least half of that period. So:
1 day = 24 hours (10 trades of 0.1 lots @ 2.4 hour intervals)

The 10 grid entries can be every 2.4 hours and this will cover a span of one day. Your
average entry price will then be the average over the 24-hour period.
Generally the more volatile the market, the longer the averaging time span needs to be (and
the more trades you will need in the grid). With higher volatility, you need more samples to
get a closer approximation to the mean price.
Variations
Mean divergence optimization
There are several variations and hybrids of the time-axis grid. One that is widely used is
called mean divergence optimization. The idea with this is to use times when the price
deviates from the moving average line to accumulate or reduce the grid position. For
example, when going long in a rising trend the strategy accumulates the grid position only
when the price is below the moving average line and reduces it only when above. Figure 3
illustrates the idea.
Figure 3-14: Position accumulation using MDO
This type of grid is often used by trading advisors and is run continuously where it
accumulates and reduces the position accordingly. The direction only changes (going
long/short) according to the long-term trend, for example the 4-week moving average.
The exit condition (reducing) is based on closing the “highest profit” position first and
running in a continuous cycle. This has the benefit of creating an incremental stream of
realized profits. The grid also has a total stop loss whereby the entire system of trades is
closed on reaching that limit. This triggers if there’s a sudden change of trend.
Fibonacci timezones
The time intervals in this kind of grid do not necessarily need to be constant. Some traders
use time axis indicators to determine the entry time points. One such indicator is the
Fibonacci timezone. Fibonacci timezone is a standard chart object in MetaTrader and most
other charting packages.
Proponents of this idea say that significant market events don’t happen at regular time
intervals. Rather they happen at intervals defined by the Fibonacci sequence.

Figure 3-15: Using Fibonacci timezones as grid entry points
The way it works is to mark out retracement points along the time axis using Fibonacci
numbers. These intervals mark likely pivot zones where price reversals could happen. Using
this method the trade timings for the grid are set to coincide with likely pivots in the market.
With Fibonacci timezones, the reference points, A and B are usually chosen to be two
significant points on the chart, for example, between two high/low price levels. The
Fibonacci zones can then be extended out into the future to give your grid entry times. See
Figure 3-16.
Figure 3-16: Using Fibonacci timezones
If you don’t have software, Fibonacci timezones are very easy to calculate either by hand or
with Excel.
Calculating Fibonacci entry time intervals:
Zone Fib sequence Time Elapsed

A Start 14:45 –
B End 15:45 1 hr

1 1 16:45 1 hr
2 1 17:45 1 hr
3 2 19:45 2 hrs
4 3 22:45 3 hrs
5 5 03:45 5 hrs
Points A and B are two reference points on your chart, let’s say they are 1 hour apart. The
time interval between the grid trades is the sum of the previous two. We start with 1 hour (1
hour + 0hrs). Next is one hour also. Zone 3 is 2 hours (1 hr + 1hr), zone four is 3 hours (1 hr
+ 2hrs) and so on.
With this example, the grid entry points would be as follows:
Fib time zone Trade Size (lots) Price Entry time Elapsed
1 Sell Open 0.25 118.62 16:45 00:00
2 Sell Open 0.25 117.91 17:45 01:00
3 Sell Open 0.25 117.85 19:45 02:00
4 Sell Open 0.25 117.89 22:45 03:00
It’s important to note that with the Fibonacci variants, in most cases the grid entry price will
not converge to the average because the interval size is not constant.
The Fibo Fan Technique
The Fibonacci fan (fibo fan) is another indicator that traders sometimes use to time the grid
entries and exits.
Fibo fan is a charting technique that extends support and resistance lines into the future. It
works by locating peak and trough pairs. An ascending fan represents a bullish chart. The fan
marks lines of support and resistance that the progressing trend will be likely to meet.
Traders often use the fibo fan combined with other support and resistance lines to decide if
the trend is intact or if it has changed. Elliott waves and the “pitchfork” are examples.
Figure 3-17: Combining Fibonacci fan timezones

Figure 3-17 shows both fibo fan and fibo timezones. The fan indicates a likely progression for
the trend based on the peaks/troughs in the last section, whereas the timezones indicate
potential entry/exit points.
This grid technique would determine where the price is within each time zone and either
accumulate or reduce the position accordingly. Typically, using the 50% line as the average,
the trader accumulates the position when the price is within the green area and reduces when
in the red area (see Figure 3-18).
Figure 3-18: Grid setup using the fibo fan technique
When the trend reverses
Whichever technique you use, you will need to have an exit strategy to close the grid when
the trend changes course suddenly.
With manual trading, visual inspection is often the best route or using a range finding tool. If
you are programming the strategy as an expert advisor, there are several indicators available
to help with this including the one above. In this case the grid is closed out before losses
increase.
Figure 3-19: Handling trend reversals

Figure 3-19 shows an example. Here, the support at the bottom of the fibo fan has broken and
the price has descended into a new bearish trend. At that point, the grid trader’s best course of
action would be to close the grid following the significant breach of the lower support line.
When to Use This Strategy

Vertical grids work well in trending markets. They are a play on dollar cost averaging as they
aim to achieve an average entry price over a certain time interval. Thereby the trader has a
higher chance of being able to profit from a rising (falling trend) which in the short term may
be highly volatile.
When used appropriately a vertical grid can reduce risk compared to “block trading”. It also
adds flexibility to a trading program by allowing the trader to enter/exit the position in
smaller units. Used appropriately, such grids are not profit multipliers, but rather a way of
reducing timing risk in volatile markets.
Pros and Cons of Grid Systems

Finally, to conclude it is important to note that grid strategies have both strengths and
weaknesses. These are summarized here.
The strengths are:
 Systematic way to make profits under typical market conditions

 If provides a way of reducing risk by splitting your trade entries
 It doesn’t rely on strong trends. Grid trading can generate profits in trendless,
predominantly sideways markets. These conditions are very common in forex.
 Using multiple entry/exit levels means you’re less likely to be “taken out” by price
spikes, market noise or abnormally wide spreads. Multiple entry points allow you to
benefit from unit cost averaging.
 It doesn’t rely on a single “absolute view” of the market direction.
 It’s relatively easy to code software (e.g. an expert advisor) to execute and manage the
order flow.
The weaknesses are:
 In order to realize profits quickly, traders are often tempted to cash in their winners too
early. But losing trades are erroneously left to ride out with deep drawdown until
retracement occurs. This can unbalance the whole system and cause it to yield a negative
risk-return.
 Some or all of your positions may end up in negative territory for a long time, so locking
up capital.
 In fast moving markets your trade orders may execute far away from your desired grid
levels. This can leave you un-hedged.
 Trade management is more complex than when performing single block trades.
 Technical issues: For the grid system to work properly, it’s critically important that your
orders, stops and limits execute correctly. If some of your trade orders fail you can find
yourself sitting on accumulating losses. This can be caused by a number of problems
from glitches in software to your broker’s technical issues.

4. Resources
Excel sheets
The following Excel sheets are available on the website:
Basic hedged grid Excel

Dual grid Excel
Single up/down Excel
Click here
Metatrader tools
You may also find the following Metatrader tools helpful:
Pivot calculator
Range calculator
Hedger/diversifier
Candlestick detector

Gridtrading Ebook 2nd 5b4b4f0700b52 e

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Gridtrading Ebook 2nd 5b4b4f0700b52 e

Uploaded by

Copyright:

Available Formats

Licensed to: tanyan.huang@163.

com: Order ID 14242 on Jul 15, 2018

Copyright © 2018 Forexop.com. All rights reserved.

Limitation of Liability/Disclaimer of Warranty

Licensed to: tanyan.huang@163.com: Order ID 14242 on Jul 15, 2018

What is Grid Trading? ............................................................................................................ 6

Unit Cost Averaging............................................................................................................... 7

Case Study 1: USD/JPY ..................................................................................................... 8

Profiting from Trends ....................................................................................................... 10

Profit Expectation: The Central Limit Theorem............................................................... 11

Grid Trading and FIFO ........................................................................................................ 12

2. Choosing a Grid Strategy ................................................................................................. 14

Grid Types ............................................................................................................................ 14

Price Dependent Grids ......................................................................................................... 14

Dynamic stop losses ...................................................................................................... 15

Hedging the grid ........................................................................................................... 16

Time Dependent Grids ......................................................................................................... 16

3. Grid Trading Strategies .................................................................................................... 18

Classic Hedged Grid System ................................................................................................ 18

Grid Configuration – EUR/USD Case Study ................................................................... 18

The Grid Profit Outcomes ................................................................................................ 19

When to Start the Grid...................................................................................................... 20

When to “Close” the Grid ................................................................................................. 21

Managing Risk .................................................................................................................. 21

Licensed to: tanyan.huang@163.com: Order ID 14242 on Jul 15, 2018

Inverted hedged grid: Profit outcomes .......................................................................... 24

The Bi-Directional Grid ....................................................................................................... 26

EURUSD Dual Grid Configuration .................................................................................. 26

The Dual Grid – In Action ................................................................................................ 27

Risk Control with the Dual Grid Strategy..................................................................... 28

Advantages and Disadvantages of the Dual Strategy ....................................................... 31

Understanding Hedged Grid Payoffs ................................................................................... 32

Trade management ........................................................................................................ 33

Calculating the Grid PL .................................................................................................... 34

The Time Dependent Grids .................................................................................................. 35

The Basic Time Axis Grid Concept ................................................................................. 36

Basic Concept ................................................................................................................... 36

Why Trending Opportunities are Missed ......................................................................... 37

Time-Axis Grid: Case Study ............................................................................................ 37

Risk/return tradeoff ....................................................................................................... 38

Setting the grid time interval......................................................................................... 38

Mean divergence optimization ...................................................................................... 39

The Fibo Fan Technique ............................................................................................... 41

When the trend reverses ................................................................................................ 42

Licensed to: tanyan.huang@163.com: Order ID 14242 on Jul 15, 2018

Pros and Cons of Grid Systems ............................................................................................ 43

The strengths are: .......................................................................................................... 43

The weaknesses are: ...................................................................................................... 43

Excel sheets .......................................................................................................................... 44

Licensed to: tanyan.huang@163.com: Order ID 14242 on Jul 15, 2018

Common statements about grid trading:

 Grid trading is reckless

What is Grid Trading?

Figure 1-1 shows a simple grid trade arrangement.

Licensed to: tanyan.huang@163.com: Order ID 14242 on Jul 15, 2018

Here the trader enters the market with 4 separate trades.

These points will be explained in more detail below.

Unit Cost Averaging

Licensed to: tanyan.huang@163.com: Order ID 14242 on Jul 15, 2018

Case Study 1: USD/JPY

The Block Trader

The trade sequence is shown in Figure 1-2.

Licensed to: tanyan.huang@163.com: Order ID 14242 on Jul 15, 2018