What is Grid Trading?

Preface

Grid Trading is one of the most basic systematic strategies for earning stable returns in volatile markets.

Price movements in the trading market are frequently unpredictable, and even when you believe you have bottomed out and purchased at the lowest point, the price is only lower and not the lowest. Because the cryptocurrency market is not like a stock with a stop limit, the market for cryptocurrencies is more volatile, with more significant ups and downs. And trading rules in effect 24 hours a day make it more elusive. Grid Trading, pioneered by the foreign exchange market, was discovered to be more suitable for crypto trading.

Grid Trading is a trading strategy defined by batch buying and selling. It has the risk diversification feature because it is set to buy low and sell high automatically as prices fluctuate. When the market price fluctuates at regular intervals, the system will activate the trading strategy, 24 hours a day, automated trading, so that we can avoid interference factors of human judgment as the system strictly executes Grid Trading.

What is Grid Trading?

Grid Trading is a market trading strategy. The system will open an automated low-buy-high-sell trade if the underlying price is within the set price ranges and touches the grid.

Structure of Grid Trading

Its set price interval, the maximum range of the pre-defined trading interval, serves as the grid’s upper and lower limits. The trading interval is then divided into multiple price bands called grids, and the interval of each price band is calculated by equal difference or equal ratio. The grid has a set number of grids and interval range limits; the size of the grid interval influences the amount of profit, while the number of grids influences the frequency of trading; the more grids there are, the higher the trading probability.

How Grid Trading works:

To profit from grid ranges, the actual operation strategy is based on the entry price as the starting point for batch pending orders, place sell orders above the set price, and buy orders at intervals below the set price. When the price within the interval down triggers the buy orders below the set price, they will be executed at the same time as the buy transaction price for the reverse operation, hanging limit sell orders. When the price in the interval rises above the set price, it will execute a sell and, at the same time, place limit buy orders in front of the sell transaction price for the reverse operation.

Grid Trading is pre-set following the investment strategy. After the setting is completed, the system with price fluctuations triggers trades. It can block the psychological manipulation of the market by human judgment and avoid irrational investment behavior.

Furthermore, with the price rising and falling within the interval, a continuous buy and sell cycle of spread arbitrage is formed, as opposed to general manual trading for more stable returns.

Introduction of Grid Trading Parameters

Upper limit price:

The highest sell price of the interval is set by historical data or refers to the upper edge of the Bollinger band, which is a difficult-to-reach price high.

Lower limit price:

The lowest buy price of the interval is set by historical data or by referring to the lower edge of the Bollinger band, which is a difficult-to-reach price low.

Trigger price:

You can set a specified trigger price. Grid Trading will automatically take effect when the underlying price hits the trigger price.

Arithmetic progression grids:

This setting is suitable for currencies with small price changes. In short, Arithmetic grids are grids with the same price difference. The central mode is suitable for general grids.

Geometric progression grids:

In this setting, each grid has the exact single-grid yield, which is suitable for currencies with high volatility. Unlike arithmetic grids, geometric grids have the same percentage of the grid price. Geometric grids are suitable for ultra-wide grids with large price gaps or unlimited grids with no price range restrictions.

Single-grid yield:

Refers to the benefit of dividing each grid equally by the interval price in an equal or proportional manner. Assuming a fixed price interval, the more grids there are, the lower the single-grid yield.

The number of grids:

The number of grids is set by Grid Trading, and the number of grids is between 2 and 200 as required by the platform.

Grid profit：

The profit generated by buying low and selling high for the grid robot.

Grid profit = single-grid spread x number of single-grid buys x number of completed sell orders.

Note that geometric grids have a fixed grid profit per arbitrage; arithmetic grids have a variable grid profit, which decreases as the market price approaches the upper limit of the grid, and increases as the market price approaches the lower limit of the grid.

Example：

Set up an ETH / USDT grid order with an upper limit of 2000 USDT, a lower limit of 1000 USDT, and a grid quantity of 10.

Suppose the price comes from 1000 USDT to 1210.41 USDT, the number of buys in a single grid is 0.007 ETH, and the number of completed sell orders is 1, then arithmetic grids profit = 111.11 x 0.007 x 1 = 0.77777 USDT, where arithmetic grids profit varies with the price and is not fixed.

1.Single-grid yield of arithmetic grids

Minimum arithmetic grids single-grid yield = (upper limit - lower limit price) ÷ (number of grids - 1) ÷ upper limit price-2 x order taking rate = (2000-1000) ÷ (10-1) ÷ 2000 - 2 x 0.2% (for VIP0 for example) = 5.16%

2.The single-grid yield of geometric grids

Grid Trading Risks

Grid trading carries the risk of loss:

If the underlying price continues to fall after Grid Trading is enabled, the system will buy every time it reaches a grid line, so the total profit is worth less in terms of loss in a continuous downward trend. However, because of the downward trend in buying the underlying, the average cost of buying in batches by Grid Trading will be lower than spot trading with a single buy.

Unsuitable for stability underlying price:

Grid Trading is appropriate for underlying that have price fluctuations and ups and downs, allowing you to profit by buying low and selling high. If you choose a stable price trend, you cannot trigger the grid to reach a deal efficiently, so Grid Trading is not recommended for stable underlying prices.

Be aware of Grid Trading fees:

When a grid is triggered to execute a complete trade, two fees are charged. The more grids that are set up, the higher the chance of triggering and the higher the fees.

Continuous one-sided market, price fluctuations beyond the grid:

When the underlying price continues to rise above the grid limit, the underlying position will be sold out in batches within the interval with the rising trend, and the grid will eventually be terminated. When the price falls below the grid’s lower limit, the position will be bought out in batches within the interval, and the grid will be terminated.

The market does not move within the set range:

The market trend does not enter the price range you set, it may lead to inefficient use of invested funds.

Grid Trading Advantages and Disadvantages

Advantages of Grid Trading

Better suited to volatile underlying markets:

When the price of the underlying fluctuates within the set interval, the grid will automatically buy and sell, increasing the likelihood of reaching a deal and profit.

24-hour automatic trading:

If you are trading manually, there is a time limit, and you cannot trade around the clock.

The price can trigger Grid Trading to buy low and sell high for arbitrage automatically and also avoid irrational human interventions such as panic selling or buying high due to large fluctuations in the market. Therefore, Grid Trading is suitable for the cryptocurrency market, where prices fluctuate dramatically around the clock.

Disadvantages of Grid Trading

Once the price interval is exceeded, the grid is terminated:

If the underlying price moves so far up or down that it exceeds the upper and lower limits of the grid interval, trading will be halted, and no profit will be made.

Possibility of lower profits than holding spot:

Although it is possible to buy the underlying in downward trending tranches to reduce the average cost of buying, the total cost of Grid Trading remains higher than a successful spot trade at the lowest price. The inverse is also true: selling at the highest point at once when the price rises will yield a higher profit than selling in batches when the price rises.

In terms of capital utilization, grid trading is inefficient:

When setting up Grid Trading, you must put a certain amount of money in the grid account. If the number of grids representing a single grid is to invest less money, buying part of the spot at the same time will also have a certain amount of money. If you wait for the price to fall, you can continue to buy the underlying, and the remaining funds will become idle funds. This leads to the problem of low utilization of funds. In addition, if the trigger rate of the underlying hitting the grid is high, the capital utilization rate is higher. When the trigger rate of the grid is lower, the capital utilization rate will be lower.

Inability to change trading strategies in a timely manner:

When the grid is set to open, it is not possible to adjust the grid’s price interval with the market price. So if there is a difference between the grid interval set at the beginning and the current market price trend, you can only close the grid manually and set a new grid.

How to use Grid Trading on Gate.io

The platform’s Grid Trading types include Spot Grid Trading for buying low and selling high in oscillating markets, Margin Grid with multipliers to reduce the cost of opening positions, and Future Grid which allows for long upside and short downside profits. The Future arbitrage grid is a trading strategy for spot and contract hedging.

The former HODL Mode refers to the strategy of converting the spread profit into coins with long-term optimism that the coin price will appreciate; the latter AI intelligent grid can backtest based on 7-day historical data and automatically calculate the highest yielding grid parameters, including upper limit price, lower limit price and the number of grids. When setting, you only need to select the investment amount ratio, of which the selected investment amount must be higher or equal to the minimum investment amount, which is recommended for novices to use.

Create a New Strategy (website):

After entering the platform webpage, click on the top navigation bar → “Copy Trading” → “Quantitative Copy” → “Create A New Strategy”.

Create a New Strategy (APP):

After entering the mobile app, click on “Copy Trading” → “Quantitative Copy” → “System Recommended Strategy” → “Unlimited Grid” → “Create”.

How to check the strategies in progress

After creating or copying a follow-on strategy, you can view it by clicking “Strategy Bot” → “My Strategies” → “In Progress Strategies” in the navigation bar.

How to view History Strategies

Under “My Strategies”, click “History Strategies” to view creation time, termination time, strategy type, trading market, total investment, grid yield, annualized yield, number of trades, the reason for termination, and action (clone).

Conclusion

Before the advent of Grid Trading, investors had to keep a close eye on the market for an extended period of time in order to see the best time to make a profit, but they could not always accurately predict the price trend, resulting in not only losses but also wasted time. Grid Trading not only provides convenience for the majority of investors, but also allows them to profit from price fluctuations in the crypto market, as long as the price fluctuations are between the upper and lower limits, even if the consolidation interval is still profitable, and this part may be better than human operation.

The most obvious benefit of Grid Trading is that it replaces humans in 24-hour automated trading, buying and selling on a regular basis, which not only overcomes human weaknesses but also avoids the irrational mindset of investors in a volatile market. This is an excellent option for investors looking to save time and improve their efficiency. It is also ideal for newcomers to crypto who do not want to stare at the market for an extended period of time but must pay close attention to spreads or are easily influenced by price fluctuations.