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Explained: Grid trading and how it can help combat crypto volatility

Explained: Grid trading and how it can help combat crypto volatility

Explained: Grid trading and how it can help combat crypto volatility
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By CNBCTV18.com Sept 30, 2022 7:31:52 PM IST (Published)

Grid trading is an automated strategy suited for all market scenarios. It involves setting multiple buy and sell orders at predetermined and uniform price intervals.

Cryptocurrencies are highly volatile. The prices of these digital assets are known to fluctuate wildly in a matter of hours and even minutes. This makes it difficult for individuals to time the market and execute profitable trades. However, many traders have begun using a common forex trading strategy – known as grid trading - to combat the volatility of cryptocurrencies and navigate the uncertainty of the market. Tag along as we explain what grid trading is and how it works.

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What is grid trading?
Grid trading is an automated strategy suited for all market scenarios. It involves setting multiple buy and sell orders at predetermined and uniform price intervals. This creates a grid of several incrementally increasing and decreasing orders, hence the name grid trading. If a cryptocurrency touches the predetermined price points, trading bots automatically carry out the buy or sell orders on your behalf. As such, grid trading requires very little human intervention.
How does grid trading work?
Grid trading works differently based on the prevalent market conditions. Here’s a quick explanation of how traders execute this strategy based on the current price trend of a given cryptocurrency.
Sideways market
A sideways market is when the price of a cryptocurrency, or any other asset for that matter, fluctuates within a tight range for extended periods. The price rises and falls multiple times but within the same range.
To use grid trading in such a market, one must first set a reference price, usually somewhere in the middle of the current price range. After deciding on a reference price, a trader can place multiple buy and sell orders.
The buy orders will all be below the reference price and placed at uniform price intervals. The trader will also set a minimum price below which the bots will not execute any buy orders. Then, the trader can set up corresponding sell orders that will be one or two grid levels above their corresponding buy orders.
The buy orders are executed when the price begins to fall. Then, when the prices begin to rise again, the sell orders will be executed, resulting in nifty profits as the sell orders are set above the buy orders. It’s the same principle with the upward and downward trending markets; only the buy and sell orders are set differently with respect to the reference price.
Upward trending market
In an upward trending market, prices rise and fall, only to rise to new highs and then repeat the process all over again. In this case, all buy orders are plotted at uniform price levels above the reference price. Sell orders are set one grid level higher than their corresponding buy orders. The trader also sets a maximum price beyond which the bots will not execute any more buy orders.
Downward trending market
In a downward trending market, a trader sets multiple short-sell orders below the reference price, all one grid price lower than the other. The trader also sets a minimum price below which no more short-sell orders will be placed. Finally, the traders opt to close the short positions one grid level below the price they were placed.
Advantages of grid trading
There are plenty of advantages to grid trading. Firstly, it has a proven history through many years of use in the forex markets. It also requires minimal human intervention, as one only needs to set the sell and buy orders, leaving bots to do the rest. This also ensures there is no scope for fear or greed to influence trades. Finally, grid trading is also suitable for all kinds of market conditions.
Conclusion
Even with all of its benefits, grid trading cannot be your sole strategy for dabbling in crypto. One needs to base this strategy on research and a thorough understanding of cryptocurrencies, their fundamentals and technical indicators, price movements and triggers, planned updates, etc. Only after a thorough understanding of the market can one attempt to use the grid trading strategy successfully.
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