Many people ask about difference between types of strategies used in expert advisors. 747 Developments prepared articles about different kind of strategies. This article will cover some important information about “GRID” strategy which has become popular in past few years.
What is GRID strategy
GRID strategy is based on placing several orders with certain distance at the same direction of trade. The order placement can be set based on certain rules or just simply by the distance in points. Order sizes can be also increased or decreased in comparison with the initial base lot size. It is necessary to understand how grid strategy works if you want to trade with it to not to burn your account. For better understanding let’s create some example.
Imagine that you want to trade EURUSD at the price of 1.10500 with the size of the lot 0.01. You have set the target that you want to close your trades in profit of 1 USD. Indicator or Expert advisor has met the condition for opening buy order because it predicts that trend will move up. So you open the buy order 0.01 at the price of 1.10500. But the trend moves down. All indications say that it should move up but the price reaches 1.10400 so you open another buy order at the price 1.10400 with size of lot 0.03. The price still continues going down and reaches 1.10300 and you open again the buy order with lot size 0.05. Now you have opened 3 buy trades 0.01, 0.03 and 0.05 lots with the distance of 100 points in between each other. Now from the 1.10300 level the price starts moving up finally. As you set the target of profit 1 USD you can close all the opened trades at the price even below original 1.10500 because the 0.05 size order will be in much higher profit at price e.g. 1.10400 than the loss of 0.01 lot order opened at price 1.10500.
This example has shown how the grid strategy is used in opposite trend direction. You can also use grid strategy in the direction of the trend or use the same lot size for all the orders. There are lots of grid strategy variations and possibilities.
Pros and Cons of GRID strategy
Let’s start with pros. The biggest advantage of grid strategy is stability of the profit if the strategy is perfectly optimized. In the picture below you can see the back-test for grid system CyberTrend EA on EURUSD M15 time-frame. Over the years there can be stable and continuous profit. But this strategy does not used that simple order addition explained in the example above but is uses much more complicated grid system.
The biggest disadvantage of this system is probably the higher risk and smaller profits (stable but smaller in comparison for example with scalping systems). You usually need account with bigger balance to trade with lower risks. As I explained in the example above imagine that system is increasing the order sizes and it will place not 3 but 15 orders before it turns to the profit. If the order lot size will be increased by 0.02 lot you will end up on 2.25 lots and all of the opened orders above will be in loss before it turns back into profit. Small accounts might not survive this strategy because of high draw-down connected with it so it is much easier to burn the account. Another thing is that strategies are optimized based on the past several years and grid system can go wrong in the future and it will easily erase all your money in very short time-frame.
How to recognize GRID strategy?
First of all it is necessary to mention that you should always select fixed lot size (or better to say stable lot size) where all the trades at the beginning starts with the same base lot. Some expert advisors offers automatic lot size calculation based on your balance or equity and you can see incredible exponential profits over time. You will never reach this in reality.
Usually the best way to recognize if the system is based on grid strategy is the stability of the results and higher draw-down. Let see the picture of the back-test in detail. It is much easier to see in in Metatrader 5 because Metatreder 5 has better overview of actual draw-down during back-test. Also you can watch deposit load change during the higher draw-down which is caused by order addition and increasing the size of the lot.
In Metatrader 4 you have to analyze the back-test results in more detail. Below you can see at least some tips to focus on. Stability of the results is the same as for Metatrader 5 but you can only see the changing deposit load. Unfortunately Metatrader 4 strategy tester doesn’t offer so powerful analysis like Metatrader 5 so you should then deeply analyze the back-test results and watch for draw-down.
Few words at the end
Grid systems gained popularity in past years among traders because of the stability of the results. But be careful especially if you don’t have large deposit on your account and you can also burn the account even if the strategy is optimized correctly because the expert advisors can’t predict the future. In the picture below you can see an example how the strategy burned the account because it was used on different trading pair than it was originally designed for. Grid systems are usually recommended for more experienced traders.
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