Grid trading is a quantitative trading strategy that involves placing automated buy and sell orders in an attempt to profit from the volatility of cryptocurrencies. Grid trading is a type of algorithmic trading that automatically executes orders through the use of grid trading robots.
In order to create an order grid that covers a range of potential market moves, this method requires placing a large number of orders at incremental price levels above and below the current market price.
Typically, a trading bot will place buy/sell orders within a predetermined price range, thereby building an automated trading grid. This automation allows cryptocurrency traders to benefit from and profit from even small price movements and avoid making emotional decisions, thereby increasing profit potential in both bull and bear markets.
This article explains what grid trading is, how grid trading bots work, and their benefits to traders.
What is grid trading?
Cryptocurrency prices fluctuate; therefore, experienced cryptocurrency traders rely on cryptocurrency market charts to make trading decisions. However, when cryptocurrency prices fluctuate wildly, it can be difficult to keep up, leading to missed opportunities and sometimes FOMO in the market. For traders who trade across multiple crypto assets and multiple cryptocurrency exchanges, things get complicated and constant monitoring becomes a daunting task.
This is where the grid trading strategy can be helpful as a quantitative crypto trading method. Grid trading helps to buy and sell cryptocurrencies within a range set by the trader. This strategy is based on the idea that the price of an asset will fluctuate within a certain range, and by placing orders at different points within that range, traders can profit from the up and down movements in price. This essentially creates a zone or grid within which the Grid Trading Bot will work and calculate profitable buy and sell orders.
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What are grid trading bots and how do they work?
A grid trading bot is a trading algorithm or code that attempts to profit from price changes within a predefined grid area. Traders set parameters or limits for the grid trading robot so that it operates within predefined ranges and executes orders according to pre-considered rules. Therefore, grid trading robot orders automatically place crypto trades.
Let’s take a hypothetical Bitcoin/Tether trade as an example to understand how the grid trading bot works and what parameters are taken into account. It is important to make sure you have enough funds available in your wallet before setting up the grid.
Set the upper and lower limits of the grid
Let’s imagine that the price of Bitcoin has been close to $15,000 in the past two weeks. Trader has 5,000 Tether1.00 USD
and decided to trade $600 above and below that range. This makes $15,600 the upper price and $14,400 the lower price.
Create multiple grid levels
The next step is to divide the upper price range and the lower price range into grid levels. Each exchange has its rules; however, all major exchanges offer both manual and automatic settings, such as Binance, Crypto.com, ByBit, and others. In manual mode, the trader can select the level, while in automatic mode, the grid level is determined automatically.
The selected grid number is the determining factor for the number of buy and sell orders in that grid. So in this example, it's set to level 7. Feel free to select and create as many grid levels as you need.
This will result in the following predefined limits within which the grid trading robot will now operate.
When the price rises and crosses the sell grid, the bot sells BTC and makes a profit. Likewise, the bot automatically buys BTC when the price drops in the buy grid. Buying and selling continues with the goal of profit until the trader stops the robot or the timer runs out.
It should be noted that all the above parameter settings are for reference only. These parameters may change depending on one's investment objectives and risk-return trade-offs. Additionally, crypto trading carries risks, and traders must familiarize themselves with all possibilities before setting up grid trading.
Benefits of using grid trading robots
Trading cryptocurrencies can be time-consuming, and automated tools can help investors make better, more rational, and more profitable decisions. Crypto grid trading bots are beneficial for the following reasons:
Automated trade execution
Grid trading bots can automatically execute trades based on predetermined rules, which saves time and reduces emotional decision-making. Traders can also scale their trading by creating multiple grid trading bots for different coin pairs simultaneously.
Faster, more rational decisions
Robots can make decisions faster than traders. Additionally, because they are not influenced by emotions, FOMO, peer pressure, or social media trends, they can maintain their trading rationale even during unstable and volatile market conditions.
Risk Management
Grid trading bots can be programmed to automatically close trades when certain risk thresholds are reached, which helps minimize potential losses. Additionally, diversifying across many currency pairs rather than trading in a single currency pair is a well-known risk management strategy: “Don’t put all your eggs in one basket.” Using a grid trading bot can Easily trade multiple pairs simultaneously.
Related: Are Cryptocurrency Trading Bots Legal?
Are grid trading strategies profitable?
Crypto grid trading strategies have the potential to generate profits if the grid parameters are configured carefully.
While grid limits and grid levels are mandatory for setting up a grid trading bot, the following terms and settings are optional on most cryptocurrency exchanges. However, when combined with grid limits and grid levels, these settings facilitate more clinical transactions.
Trigger Price: This is the preset price at which the grid trading robot will start its operation. No buying or selling activity will occur until the market price reaches the trigger price. Once the market price and the trigger price are the same, the bot is triggered and the grid starts trading.
Stop Loss Price: As the name suggests, this is the point at which the Trading Grid Robot will automatically close all positions to prevent heavy losses. The stop loss point is below the minimum price limit and the trigger price. Setting this will help protect traders as the trading grid will stop working when the market price drops below the stop price.
Take Profit Price: Above the price limit and trigger point. When the market price hits the take profit price, the robot will sell the underlying cryptocurrency, collect the profit, and automatically terminate.
Another important aspect to consider when using a grid trading robot is the trading fees. If an exchange has high transaction fees, and a grid trading bot quickly executes multiple trades in a short period of time, the transaction fees can add up and eat into overall profits. It is necessary to ensure that overall, the transaction generates more profit than the costs incurred.
Grid trading occurs in spot and futures cryptocurrency trading. Spot grid trading bots only generate profits on deployed funds as they use spot wallet funds and insufficient funds will automatically stop trading. This makes spot trading relatively safe since the transaction is entirely with your own money. The Futures Grid Trading Robot uses margin trading and can borrow funds in excess of available funds. This allows traders to make larger cryptocurrency trades with additional risk exposure.