This is another article on the risky strategies and trading advisors. Stock market and Forex market have been brainstormed by the mathematicians, physicists and scientists from other fields in an attempt to systematize the market moves and get a hundred percent profit without risk – or at least with the precisely calculated risk. It would be wrong to say that their efforts were in vain. There were businesses and foundations that have become famous worldwide thanks to the phenomenal profits, but unfortunately these companies went bankrupt in the end because one day their strategies and calculations stopped working and generating income, and turned into large, critical losses. In this article we will review a grid EA or a modern attempt to restrain the market with the pre-defined levels of buy and sell.
At Forex, the term “grid” refers to the orders to buy and sell that were put in advance. Normally, these levels are arranged equidistant from one another – for example, every 100 points. What is the operating principle of the grid EA? Upon reaching a pending order, the deal become active, and its further outcome depends on the dynamics of the currency pairs’ movement or the selected financial instrument. Along with the theory, we will provide practical examples. Let’s assume that we have the following position of orders (the current rate is 1.2950):
- Buy EUR/USD at 1.30
- Sell EUR/USD at 1.29
- Buy EUR/USD at 1.28
- Sell EUR/USD at 1.31
As you can see, the difference between the levels in our case is 100 points. The first thing to happen because of our positioning of the orders is either buy at 1.30 or sell at 1.29. In this case, we do not analyze the chart and do not take into account any fundamental factors. After opening the orders, the trader using the grid EA is just waiting for the outcome of the deal – it will be either a gain or loss equal to 100 points. This, in fact, is the essence of the grid. Experienced traders will tell you right away that this model is doomed to failure, because even while maintaining a breakeven trade, the commissions, swaps and slips will sooner or later lead to a zero balance deposit. We won’t argue, because that’s true!
This was an example of one of the first models of the grid, which was largely designed for the stock market. Due to the nature of the stock market, the minimum value of financial assets is limited to zero, while the maximum share price tends to infinity. The deals were open to buy in priority – even when reaching new highs, the sell orders played a role of the stops. Following such a simple system during the bullish market years, the grid EA brought huge profits to the mathematicians and made them stars of Wall Street. With the beginning of a bearish trend the strategy lost its relevance.
The application of the grid became the constant practice on the Forex market as well, but it was the system of exchange rates that was taken into account. Despite floating exchange rates, the currency's value can neither fall to zero nor grow constantly. In other words, exchange rates always have boundaries of its existence – trading ranges. Yes, these boundaries are blurred, they are not clear and can eventually move, and form new actual ranges. All this was taken into account when using the grid on Forex.
For example, one of the varieties of the grid is Martingale system, under which each successive deal is opened twice the capacity in the N number of points. Since the currency pair rate sooner or later begins to move in the right direction, the trader makes a profit. Moreover, the analysis of the market fades into the background and makes almost no sense. The grid EA also exists in the following form: the trader determines all important technical levels on the price chart and respectively puts orders to buy and sell in those places. This type is perhaps the most optimal, but technical levels do not always cope with their goals and often break down and lose their relevance, so if you want to use this strategy, you must have a perfect understanding of the market, as well as of economic and political situation.
Using grids today is extremely risky. The automated EAs are ineffective, and it is very hard to manually define all levels and avoid mistakes. Martingale is a haven for many traders and investors, but its effective use requires a lot of capital. Nevertheless, it will be useful for every trader to further explore the capabilities of the grid and practice in its use.