A word about grids

I often have people asking me about the risks of grid trading. For those that don't know Grid Trading" is a strategy that is employed in an attempt to turn losing trades into winning trades. It takes various forms such as cost-averaging which is a common strategy when you are building up stocks in a portfolio over time. The theory is that as price drops you buy more because you are getting them cheaper. All the while, the average purchase price of your portfolio is getting less and less. It is a valid strategy and works well for scaling into stock......of course with highly leveraged trading such as forex, it comes with risk. You are compounding a leveraged losing position and it is possible for the price to drop far enough that you run out of money in your account and the broker will liquidate some of your positions for a substantial loss. The so-called margin call.

Even worse than cost-averaging is where traders increase their trade sizes as the market moves against them(called martingale). Generally EA's that employ these strategies perform very well in the very short term.....and then they fail in spectacular fashion. Systems like this seem to be popular, especially among the Russian trading diaspora. They run these EA's and make a point of withdrawing profits on a regular basis, knowing that the inevitable will happen.

Some might say that my EA uses grid trading, and they woulldn't be wrong but there is a difference.

Generally I would agree that grids are unlikely to succeed in the long term but one has to look at why. IMHO the big problem with grids is that they trade few pairs and once they are in a series of trades, they no longer produce any profit until the grid has closed in profit. Often the silent killer in these systems are months of drawdown, whilst swaps gnaw away at the equity. Don't even get me started on the futility of hedge grids.

Being a multi-currency EA, my system still continues to produce profit whilst some pairs may have a drawdown, still winning some 80% of trades. Even then trades that build a grid end up producing some income.

Consider for a moment a pair like USDTRY which produces, typically $130 per 0.1 lots per month. This is $1560 per year, or 15.6% return(on a $10k account). I know this doesn't clear the drawdown but I believe you can see the benefits. It's a hidden gem, like compound interest.

Consider that most grids need to clear themselves ASAP to keep making money, leading to either increased lot sizes(martingale) or tight grids. Both of these threaten the safety of your account.

Conversely, in my system, for the 2 reasons first mentioned, we are not concerned with clearing out the grid at the risk of the account. We adopt it as a carry trade. We therefore trade so conservatively that it is unlikely that your account will ever be threatened with a blowup, and still produce satisfactory returns.

There will be those that try and increase returns by trading larger lot sizes and they may even blow up their accounts but I am aiming to have clients achieve consistent 5% per month and be able to do it with 1:50 leverage.