April 17, 2024

Grid Trading Explained – Trading Volatility in Sideways Markets

If you’ve dabbled in crypto trading long enough, you’ve probably seen or heard the words grid trading compounded with related success stories more than once.

In this blog post, we are putting you through boot camp about everything grid trading and then some.

We’ll start with the theory and logic behind the grid strategy, which assets it is most suited to, and the ideal market conditions for it. Then, we’ll continue with the role of automated trading in all of it, our recommended grid bots, and some helpful steps for moving ahead.

It’s going to be interesting, so stay tuned.

Understanding Sideways Markets

To fully understand the grid trading concept, we must start by reviewing it from a technical analysis perspective. To be more specific, we need to know what trading sideways means.

Sideway trends, also known as horizontal channels or simply “consolidation,” are times in the market when prices are relatively stable.

From a theoretical standpoint, it means that there is an equilibrium between supply and demand in the market. In other words, buyers aren’t able to push the price up, nor are sellers able to bring the price down.

Technically speaking, this stand-off between buyers and sellers creates a pattern in which prices seem to fluctuate within a range bound with distinct borders.

The bottom part of the range is often referred to as support, as it “prevents” prices from going down any further. Another way to look at it is to imagine that there are enough buy-limit orders placed at the support line, so every time the price reaches that level, it just bounces right back up.

The upper part of the range is called the resistance level. The same logic applies here, where a substantial number of sell-limit orders placed next to the resistance line keep prices under control, restraining them from moving upwards.

When an asset’s price exits the horizontal channel meaningfully for a reasonable amount of time, it usually means the market’s consolidation phase is over and a new chart pattern is about to unfold. This shift between chart patterns is often called a “break,” as many traders imagine the price action shattering the support and resistance lines toward a new destination.  

Many technical indicators can help traders recognize horizontal trends. While some, like ATR (average true range), RSI (relative strength index), and HLB (high-low bands), may require a deeper understanding of technical analysis concepts, trading volumes, which tend to be lower during horizontal times, are a simple and reasonably accurate indicator for sideways markets. 

Understanding the Grid

While some may perceive horizontal markets as boring and less exciting times to trade, with the grid strategy, this is far from the truth. Thanks to grid trading, sideways markets may present even more potential than dramatic market swings, at least from a risk-reward point of view.

The grid strategy is a trading method designed to capitalize on price changes, even subtle ones, between a horizontal channel’s support and resistance lines. Its sole purpose is to take full advantage of sideways market trends when they occur, enabling traders to get the most out of them without taking unnecessary risks.

In other words, grid trading is a fairly conservative strategy focused on relatively low-risk and short-term trades. This strategy potentially leads to a slow but steady growth of traders’ accounts. With tight stop-loss and take-profit goals, it simply attempts to follow one of the first trading rules and not take unnecessary risks.

Navigating the Grid

The grid is essentially a collection of conditional trades surrounding the mid-point of the trading range, waiting to be triggered once market conditions are met.

Buy-limit orders are placed at, or slightly above, the support level, and sell-limit orders are placed in the same way (just below instead of above) around the resistance level. When looking at a chart, this setup creates a structure that is visually similar to a grid, hence the name of the strategy.

While identifying sideways trends and setting up a grid is straightforward, especially once you gain some experience with it, successfully implementing grid trading into the market is a whole different game, especially in the world of cryptocurrencies. 

The volatile nature of cryptocurrencies, coupled with the 24/7 operations of crypto exchanges, means that trades on the grid can potentially be triggered at virtually any time. Speed and accuracy are essential to its success as a trading strategy based on fast and short-term trades.

This is why many traders using the grid strategy for trading cryptos are doing it with the help of automatic trading. Grid bots are the best way for traders to exploit the full potential of grid trading, as they offer the most consistent and precise execution of this strategy.

Automating the Grid

When looking for the right automated solution to execute the grid strategy, traders should consider a few things.

First and foremost, traders should be focused on reliability. There are only a few things in trading that are more frustrating than losing your hard-earned cash due to faulty execution. This scenario can be easily avoided by choosing a trustworthy grid bot supplier. 

Traders are urged to do extensive due diligence before choosing a grid automation solution. Do your research, and don’t get tempted by questionable suppliers offering suspiciously cheap or even free crypto trading bots. Try looking for suppliers with a proven track record of success and positive user reviews. A tier-one grid trading solution might cost a little more, but this initial investment should pay for itself in the long run.

Another factor traders should evaluate is the level of customizability the grid bot supports.

While basic bots offer limited options for setting up the grid, advanced grid bots enable traders to make adjustments. From setting up a more comprehensive grid with more triggers to configuring different stop-loss and take-profit for each trade dependent on its location on the grid (and much more), these advanced features are a must-have to make the most of grid trading.

Traders should also take the overall user experience of their bot into consideration.

As the field of automated crypto trading was historically dominated by computer geeks, many of the market’s crypto bots still offer complex interfaces that can be successfully navigated only by programmers.

While user-friendliness is always nice, it is necessary in grid trading. Maintaining a functional and profitable grid requires constant monitoring with the occasional fine-tuning, so don’t settle for a less-than-optimal user experience that makes every little tweak a complicated task. 

Final Thoughts

Grid trading, especially in volatile markets like crypto, is arguably one of the most recommended strategies once traders recognize the market is trending sideways.

As deep-pocketed buyers and sellers try to decide in which direction the next break will be, grid bots offer a straightforward method to capitalize on their ambiguity.

Although grid bots are indispensable for successful grid trading, it’s essential to acknowledge that not all bots were created equal. Some are just better than others. So why not start with the best?

Begin your journey with grid trading today with a 14-day free trial with one of, if not the, most advanced grid bot available for crypto traders today.