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Grid trading, also called the no stop, hedged, grid system has become very popular amongst forex traders because it does not use stops, is highly mechanical, has no reliance on direction, uses the natural wavy nature of the market, does not require indicators or charts to trade and can be easily automated.
On the downside it can appear complex and illogical initially, it can incur large drawdowns if poorly managed, requires more patience than normal and may require forex traders to make a huge paradigm shift it their thinking.
Grid trading refers to the trading approach which uses fixed price levels to enter and exit trades. Grid gaps are the gaps between these price levels.
The steps to trading the grid system are simple:
Step 1: A trader would start out by selecting a grid gap suitable to the currency traded.
Step 2: The trader would enter a simultaneous Buy and Sell in the currency. Normally this will be done at a round number value price for the particular currency.
Step 3: The transaction price would move away from the entry value by the grid gap value determined in step 1
Step 4: At that level the trader would enter another simultaneous buy and sell transaction. The trader will also cash-in or close the profitable transaction from the previous level and leave the negative transaction open
Step 5: Continue trading until positive or breaking even when the price reaches the next grid level. When this happens cash-in or close all transactions and start all over. You would also cash-in all your transactions if your transactions have reached your predetermined maximum drawdown level.
So using the process above you will make a profit every time the price moves from your start position to the next grid level and back again. This is called the one hundred percent retracement formation. You will also make a profit if the price moves from your start position two levels away and retraces to the previous level. This called a fifty percent retracement formation. The trader will breakeven if the price moved 3 levels away from the starting point and then retraces for one level.
The trick is to control losses as positive transactions are cashed in on a linear basis while losses grow exponentially if left unchecked. If is therefore generally recommended that grid trading should not go beyond the fourth level from the starting point. When this happens it is better to close all transactions. The loss should be approximately six times the grid gap size at that point.
The key success factors to Grid Trading is selecting currencies that are range bound and selecting grid sizes that will protect your trades from reaching the forth grid level from your starting point. As with every trading technique it should be thoroughly back traded and tested before being used in live trading.
All of this may sound very complicated but many times convenience of a profitable mechanised trading technique outweighs the downsides.
For additional information click on this link http://hedged4x.com
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