Grid Trading Like a PRO (Full Breakdown)

Grid trading is a popular trading approach in the crypto and traditional financial markets. It shot into the mainstream in the late 20th century with the advent of electronic and especially automated trading (i.e., bot trading). 

In this article, we’ll give you a complete breakdown of grid trading. You’ll learn what grid trading is, how it works, and how to create winning crypto grid strategies while avoiding risk.

If you’re not familiar with the fundamental concepts of crypto trading, check out our ultimate crypto day trading guide to get up to speed. 

What is Grid Trading?

Grid trading involves placing an equal number of BUY and SELL orders at even intervals on specific asset market price levels. This creates a grid of orders that can get filled as market volatility pushes the price up and down. 

Do You Need a Bot to Grid Trade or Can You Do It Manually?

Grid trading is almost always done using a trading bot. While you could trade manually, it is not advisable. Trading manually can become exponentially more difficult the more positions you add, especially if you’re trading on shorter timeframes, which is often the preferred approach. 

What Are the Advantages of Grid Trading With Bots? 

Choosing to automate your crypto grid trading with a grid bot has many advantages. For starters, it’s much quicker and easier to set up your positions when using a bot, as well as put in place the necessary stop-loss orders that ensure the safety of your funds.

Not only that but overseeing the performance of your strategy becomes much easier. Many bots, like the grid bots offered by Dash 2 Trade provide a detailed breakdown of your profit and loss (PnL), open, closed, and partially filled positions, and other valuable information. 

Bots also often feature a termination button that closes all your positions and ends all trading with one click. This is incredibly useful in the event of sudden, unexpected market volatility — like in the case of a market crash.

Editor’s Note: From this point on in the article, we’ll be covering the topic of grid trading exclusively in the context of bot trading. 

How Does Grid Trading Work?

The “grid” in grid trading comes from the way trading orders look on the chart — a series of parallel lines, forming a grid pattern, depicting the price levels where the traded asset will be bought and sold.

These lines are spaced at equal intervals, determined as a percentage above or below the starting price.

What Types of Grid Trading Are There?

Spot trading and futures trading are the two most popular ways you can trade a grid. Each has its advantages and disadvantages: 

Spot Grid Trading

This method is based on the more traditional and familiar form of trading. In spot grid trading, your bot creates limit orders that directly buy and sell assets. The key characteristics of spot grid trading include:

• Immediate Transaction: Each trade involves the immediate exchange of assets.
• Simplicity: It's straightforward, as you're dealing with the actual asset rather than a contract.
• Lower Fees: Lower fees compared to futures trading.
• Risk and Reward: The risk is generally limited to the value of the asset you own, but so is the potential reward, as there's no leverage involved.

Futures Grid Trading

This method involves trading futures contracts, which are agreements to buy or sell an asset at a predetermined price on a future date. Key aspects include:

• Contract-Based: You don't own the asset immediately but have a contract specifying the future transaction.
• Leverage: Futures trading often involves leverage, which can amplify both gains and losses.
• Flexibility: Allows for strategies like short selling, which might not be available or are more complex in spot trading.
• Risk: Requires careful risk management due to the leverage and potential for significant losses.

What is a Grid Trading Range?

A grid trading range is the price difference between the highest and lowest order on a grid. All other orders part of a grid strategy, except for any stop-loss orders, are contained within this range.

What Happens if the Price Escapes the Grid Trading Range?

If the price moves above or below the upper or lower bounds of the defined trading range, a few scenarios can play out, depending on the type of grid trading you’re doing and the options provided by your exchange and bots:

• Trading pauses: The grid bot may halt new trades, leaving existing positions as they are. 
• Take-profit mechanisms: If the price breaks through the grid range in a favorable direction, some bots can be configured to automatically liquidate all existing positions.
• Stop-loss mechanisms: To protect against significant market downturns, some setups include stop-loss orders that close positions at a specific price level, limiting potential losses.
• Grid adjustment or rebalancing: Some bots offer automatic grid adjustments to adapt to new price levels, which is useful in volatile markets but requires careful management to mitigate risks.
• Manual intervention: Traders can manually adjust the grid, close positions, or change strategies for greater control. This demands continuous market monitoring.

As you can see, there are many possibilities and these are just some of the more popular ones. Custom bots can be configured to act in all sorts of additional ways based on the trader’s individual preferences and strategies.

Creating a Successful Grid Strategy

Grid trading, like any other form of trading, requires a solid strategy. Without one, you will be hard-pressed to make consistent profits using this method. 

When Does Grid Trading Work Best?

Before you set out to create a strategy you need to understand the strengths and weaknesses of grid trading. 

Grid trading works best in volatile sideways markets — when the price of an asset is rapidly bouncing up and down in a wide channel (i.e., in a specific price range where prices experience a lot of volatility).

Additionally, deep markets, with lots of trade orders and high trading volume, offer a better grid trading experience by allowing each grid order to fill quickly during rapid price changes.

Long Grid Trading and Short Grid Trading

In trading, your strategies depend on your market expectations:

• Going Long: If you anticipate that the market will rise, you create long positions. This means buying an asset with the expectation of selling it later at a higher price, thereby making a profit.
  
   
• Going Short: Conversely, if you predict a market downturn, you might opt for short positions. This involves strategies aimed at profiting from a decline in the asset's price.

Short Selling: A Quick Primer

Short selling is a strategy used to capitalize on an expected price decline of an asset:

At its core, short selling involves selling an asset you don't currently own. The common perception is that you are "borrowing" the asset to sell it, with the obligation to buy it back later, hopefully at a lower price.

While short selling is often associated with leverage, it can occur in various forms, including traditional spot trading, margin trading, and futures trading.

Margin Short Selling

Margin trading allows you to short sell with leverage:

• Collateral (Margin): To engage in margin short selling, you provide collateral (the margin), which secures the borrowed funds or assets.
  
   
• Borrowing and Selling: You borrow the asset (e.g., Bitcoin) and sell it immediately. The goal is to repurchase the asset later at a lower price, return the borrowed amount, and keep the difference (minus fees) as profit.

Futures Short Selling

Futures trading offers another avenue for short selling:

• Futures Contracts: In this method, you enter a contract agreeing to sell a specified amount of an asset at a predetermined future date and price. This is done without the initial exchange of the actual asset.
  
   
• Settlement: The profit or loss is determined by the difference between the contract price and the market price at the contract's settlement time.

How to Use Technical Analysis When Grid Trading

Understanding the nuances of grid trading is just the beginning. To effectively implement this strategy, it's necessary to get comfortable with price chart technical analysis (TA). Grid trading thrives in volatile, sideways markets, and identifying these conditions requires skillful interpretation of price trends. 

Here's how you can leverage chart analysis tools to dial in your grid trading strategy:

Identify Strong Support and Resistance Levels

Support and resistance levels are key elements on every price chart, marking the boundaries within which an asset's price often consolidates. These levels are crucial for grid trading, as they define the range where sideways trading — essential for this strategy — typically occurs.

• Support Levels: These act as a floor beneath the price, preventing it from falling further. A strong support level is characterized by the price rebounding upwards after reaching it. Essentially, it's a threshold below which the price hesitates to drop.

• Resistance Levels: In contrast, resistance levels cap the upward movement of the price. They serve as a ceiling, beyond which the price finds it challenging to rise. When the price approaches this level, it often retraces back down.

A breach of these levels — either support or resistance — can indicate a potential price breakout. If this breakout sustains, the price is likely to continue in the direction of the breach. This is a critical moment for grid traders: if, for example, your grid bot is set for long positions and the price breaks upwards, you stand to gain. However, losses may occur if the price falls below the support level. Therefore, it's vital not only to identify sideways channels but also to understand the broader market trend.

Identify a Broad Price Trend, Find a Channel and a Good Entry Point

What you need to realize is that while on one timeframe (e.g., 1 hour) the price could be trending down, on another, larger timeframe (e.g., 1 day) it could be in a very strong uptrend. 

And on yet another timeframe, like 15 minutes, it could be consolidating in a channel. 

You will have to carefully decide when and in what time frame you want to run a grid trader, depending on your strategy, including how you manage risk (more on that later).

Here’s how you can do this: 

1. Look for a channel where potential consolidation may occur or is already occurring. You can do this by analyzing recent support and resistance levels. 
   
   Remember that the further back you go the less relevant the feedback from the charts tends to be. Recent support and resistance levels are more reliable. Don’t hesitate to switch timeframes.
   
    
2. Identify the broader price trajectory by looking at larger timeframes. 
   
   While most grid trading is done on shorter timeframes, looking at longer ones can reveal new perspectives, not only about the trend but also about the strength of support and resistance levels on shorter timeframes. Sometimes these levels can overlap with others on longer timeframes, compounding to become stronger.
   
    
3. Look for possible entry points. The optimal time to start your grid bot is when the price has just bounced off of either a support level (if you’re going long) or a resistance level (if you’re going short).
   
   After the price hits support or resistance, it’s advisable to wait for things to play out for 3-5 trading candlesticks to prevent falling for an unsuccessful price reversal, leading to a breakout.

Learn to Recognize Potential Price Reversals

Prices ride up and down the charts with a certain momentum and there are technical indicators to track this momentum, conveniently called momentum indicators.

Momentum is an abstract concept. It refers to the rate of change and trading volume size behind a price move. Naturally, when demand is high and supply stays fixed, prices go up, but demand can’t be high forever. When demand dries up or is outstripped by sell pressure momentum falls as well. This is when trend reversals can occur.

Significant reversals often happen at support and resistance levels, but not always. Additionally, there is no guarantee that a reversal will happen on the same support or resistance level every time. So if you start seeing the price nearing one of these levels, it’s time to check the momentum indicators: 

 

• Relative Strength Index (RSI): This famous momentum indicator is invaluable in grid trading as it is very good at giving quick visual feedback on overbought and oversold market conditions. It works by tracking the magnitude of price changes. Overbought conditions usually present with an RSI above 70 and an asset is considered oversold when the RSI is below 30.
  
   
• Moving Average Convergence Divergence (MACD): This indicator tracks the difference between two exponential moving averages (EMAs), specifically the 12-period and 26-period, and plots a line on the charts. It then overlays another 9-day EMA over it. The relationship between the first line (signal line) and the 9-day EMA can warn of potential price reversals and clearly show reductions in momentum.

• Money Flow Index (MFI): MFI is a less-known indicator that, when coupled with the RSI, can provide highly accurate results. It’s an adaptation of the RSI which includes trading volume in the final result. This produces a “volume-weighted” interpretation of the price momentum. It’s common for price moves that aren’t supported by larger volumes to retrace. 

Set the Correct Grid Trading Range and Stop-Loss 

TA will ultimately help you with the most important factors of grid trading — setting the right range for your bot and adding necessary stop-loss orders. Use the tools and techniques mentioned above to find the perfect range for your bot.

The bottom of your grid’s range (i.e., the lowest price level in the range) should rest on a support level, where the price has a high potential to bounce off from. Similarly, the top of the range should be placed on a strong resistance level, where prices usually fall from.

 

It is also recommended that you set a stop-loss, this will protect your bot’s funds from unexpected market moves against your positions. A stop-loss is essential in any strategy that seeks to manage risk effectively. One approach is to set the stop-loss at a fixed percentage or price distance away from the support or resistance level. For example, you might set it 1-2% below the support level or above the resistance level. The exact percentage or distance can depend on the asset's volatility and your own risk tolerance.

In highly volatile markets, you might need to set your stop-loss further away from the support or resistance level to avoid being stopped by normal price fluctuations. In less volatile markets, a closer stop-loss can be more effective.

When Should You Stop Grid Trading?

When it comes to ceasing grid trading activity, there are two questions that arise: 

When Should You Stop a Grid Bot Trading Session?

• Market Trend Shift: If the market shifts from a ranging to a strong upward or downward trend.
• Price Breakout: When the price significantly breaks beyond your grid range, either above or below.
• Volatility Spike: Excessive volatility that exceeds the risk parameters of your grid strategy.
• Profit/Loss Targets Met: Reaching predetermined profit or loss thresholds set for the trading session.
• Technical Issues: Encountering operational problems with your trading bot or platform.
• Monitoring Challenges: Inability to regularly monitor and adjust the grid due to time or resource constraints.

When Should You Stop Using the Grid Trading Method Altogether?

• Persistent Market Trends: Consistently trending markets (either bullish or bearish) where grid trading is less effective.
• Fundamental Market Changes: Significant changes in market fundamentals that affect the asset's typical behavior.
• Personal Financial Shifts: Changes in your personal financial situation leading to a different risk profile or investment capacity.
• Liquidity Issues: Trading in markets or assets with low liquidity where grid trading becomes risky or impractical.
• Emotional Impact: If grid trading is causing undue stress or impacting your mental well-being.
• Strategy Misalignment: If grid trading no longer aligns with your overall investment strategy or goals.

Grid Trading: Final Thoughts

Grid trading is one of the most popular trading approaches for crypto and many other asset classes of similar volatility. It’s easy to understand and can be a good way for beginners to get into trading with bots. 

It’s perfect for volatile, highly liquid markets and doesn’t expose the trader to too much risk — so long as they don’t use unreasonable amounts of leverage, of course. 

Dash 2 Trade’s Grid Trading Bot

If you’re ready to jump into grid trading crypto and want the simplest onboarding and trading experience possible, we’ve got you covered. 

Our grid trader is built with ease of use in mind. The setup is dead simple. All you have to do is subscribe and follow the step-by-step instructions in your Trading Bots tab to configure your first bot. 

Don’t believe us? Check out this grid bot setup guide!

Join the Dash 2 Trade community, ask us anything, and be the first to learn about new features on the platform.