Gate.ioBlogStop At A Loss? Do You Really Understand The Benefits Of Grid Trading?
Stop At A Loss? Do You Really Understand The Benefits Of Grid Trading?
13 May 18:47
Many beginners will encounter a problem when trying to conduct grid trading: set the grid strategy or copy a grid strategy with good historical returns by strictly following the tutorials and instructions. But a loss happened as soon as the grid strategy ran before even a complete buying and selling transaction was completed. Then you will worry if something went wrong with their settings, or if the copied strategy is actually reliable or not, so you hastily stop the grid strategy to stop the loss.
In fact, this so-called stop-loss behavior is precisely the key factor that causes users not to profit from grid trading in many cases because a classic profitable grid strategy often moves from "loss to “excess profit after running.
The reason for this, first of all, is to start with the calculation method of account profit after running the grid strategy.
The benefits of the grid strategy (which can be extended to any kind of copy trading strategies) consist of two parts. The first part is the transaction income, also known as the grid income, that is, the benefits brought to the user by each transaction The second part is the floating profit and loss, that is, the income brought to the user due to the currency price changes when there is no transaction. For example, according to strategy S, the user buys a unit of a certain currency (called B currency) at the price of 1 US dollar, so that the user holds a unit of B currency. Next, suppose the price of B currency becomes 0.8 US dollars, then the value of a unit of B currency held by the user drops from 1 US dollar to 0.8 US dollars, then the user's floating profit and loss is (0.8-1) US dollars * 1 = -0.2 US dollars.
At this time, even if no transaction occurs,due to the decline in the price of the currency held, the user's account value is also reduced, with the floating profit and loss negative.
The above example solves the problem of why some users lose money when they do not finish a complete set of buying and selling transactions. Because the user bought a certain amount of currency through the grid strategy, but before it was time to sell, the price of the coin fell, and there was a negative floating profit and loss on the user's account.
Why is it that a classic profit grid strategy often loses first and then gains?
Because the essence of the grid strategy is to buy low and sell high (do long grid), as shown in the following figure.
The strategy is to gradually buy the currency according to the grid price when the coin price is down, this is, gradually buying in when the coin price falls down, and selling out when the coin goes upwards, which generates excess returns. The purchased currency when the price falls will inevitably produce a negative floating profit and loss. It is easy to explain that: for example, the strategy buys BTC when the price of BTC goes down. The first purchase price is $10000 and the purchase quantity is 1. The second purchase price is $5000 and the purchase quantity is 1, which means that at the moment of the second purchase of BTC, the BTC price has become 5,000 US dollars 1 unit, and the cost of 1 unit of BTC previously held by the user is 10,000 US dollars, so the user's floating profit and loss is 1* (5000-10000) = -5000 USD.
So should the user stop the grid trading at this time? No!
As long as BTC does not fall all the time, but rebounds to the position of more than $10,000, then the user's account will generate profit. First of all, the rise in the price of the coin will naturally bring positive floating profit and loss. Secondly, in the process of the upward price, the grid strategy will automatically sell the BTC bought at low cost, bringing trading gains. As long as BTC can bounce back above $10,000 in the range, users will reap positive gains.
So a typical grid trading yield curve trend might look like this:
The yield curve should first fall and then rise, and finally achieve positive returns.
Therefore, don't rush to stop the grid strategy that looks like a loss at the beginning, which is likely to be just a precursor to its profit.