Crypto traders adopt several strategies in an attempt to maximize profits while reducing trading risks. One of the most widely use trading strategies is grid trading, and which is widely applied in many markets, including the crypto market.
This is a systematic trading strategy in which a trader sets multiple predetermined price levels to which buy or sell orders are automatically executed when the price touches such levels. The price levels are set both above and below the current price, so that there will be a series of buy orders executed whatever happens.
Since it is systematic, it is an automated process that is executed on autopilot once the treader sets the price levels. The idea behind grid trading is that the crypto market is volatile, so the trader wants to maximize profit from the volatility.
How Grid Trading Works
To set up a grid trading strategy, the trader has to first find the trading range parameters for their chosen exchange. The range parameters determine the upper and lower limits where you’ll place your buy and sell orders.
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The series of trades forms a grid with gridlines of fixed distance between them. You’ll then set the maximum price level above which no orders are executed, as well as the lowest level below which no orders are to be executed.
To illustrate, assuming Ethereum’s current price is $2,000, you can set buy orders at $500 below the price. The orders will therefore be at $1,500, $1,000, and $500. A similar method is used to set sell orders, but with $500 above the current price rather than below. The bots will automatically execute the orders once done.
Pros and Cons of Grid Trading
Grid trading is a great strategy for taking advantage of volatility, so it is particularly suitable for crypto trading. However, it has both pros and cons. The following are the pros and cons of using this strategy to trade.
The most important pros of using grid trading are:
Automated: Grid trading is an automated trading strategy. The trader simply sets the price levels at which trades are to be executed and the trading bot does the rest. Because of this, anyone with any level of trading knowledge can use it.
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With grid trading, a trader can enter positions that they would ordinarily not be able to enter manually. With automation, traders can achieve lower entry points they can’t afford to monitor manually.
Good Risk Management
By using an automated grid trading bot, traders can use their preferred settings to maximize profits and reduce their risks significantly.
Traders are humans, so they have emotions that can get in the way of sound decisions in trading. Using a grid trading bot effectively eliminates this tendency and increases the possibility of executing trades without abrupt changes that can result in losses.
The following are some of the cons of grid trading.
Long Wait Time: Because grid trading is automated, it only executes when the conditions for trading are met. This means that you’ll have to wait patiently for long timeframe trades to execute. This may sound easy but it’s quite difficult in practice. Some trades can take weeks or even months.
Fails Without Volatility
Grid trading thrives on volatility. While volatility is widely considered to be a negative thing, grid trading doesn’t work without it. Therefore the entire setup fails if the market moves in one direction for too long. It therefore requires diligent research to ensure that the market is volatile enough.
Difficult to do Manually
Grid trading is done using a bot ideally and you can maximize its use that way. You may also do it manually though. However, this requires a lot of attention to pull off, which means you’ll need to be regularly checking to ensure trades are executed correctly. This can be tasking and not everyone can do it.
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