One of the most difficult aspects of any trading system is predicting future price direction. The Forex grid trading strategy removes the need to predict the future by using a method designed to capture profits regardless of which direction the price turns. Forex, or foreign exchange, is the world's currency market, where various currencies can be exchanged. Currency in the Forex market is paired with currency from another country. For example, the USD/EUR pair represents the price people are willing to pay for the U.S. dollar with Euros.
Profit in Both Directions
When trading Forex, it is possible to make money whether the price is rising or falling. If the price is rising, you make money by selling for a higher price than you paid. You can profit from falling prices using a technique called short selling. Short selling involves borrowing a currency pair from your broker, selling it to someone else and then buying it back later. If the price you are able to buy it back is lower, you profit from the difference.
Buy and Sell Stop Orders
Most Forex brokers offer a number of order types to choose from. A stop order activates once a certain price is reached. When you place a buy stop order, you will buy a currency pair if the price trades as high as the stop price you programmed into your brokerage account. A sell stop order will sell your position if the price trades as low as the price you programmed. If you do not own the pair you wish to sell, a sell stop order will create a short sale.
Forex pair price movement is measured in percentage points called pips. A pip is the smallest percentage point a pair can move. For example, one pip for the EUR/USD is 0.0001. Grids in the Forex grid trading system are randomly chosen price intervals, usually representing round numbers, such as 10, 20, 30 pips. Some traders may use 50-pip grids, while others may use 100-pip grids.
Buying and Selling
The grid system is based on an assumption that the future price direction cannot be determined, but that if the price moves above one grid, it is likely to continue to the next grid. The system is simple. After choosing your grid interval, you place a buy stop order above the nearest grid and a sell stop order below the nearest grid. Once a position is taken, profit is earned at the next grid. For example, if the price moves up 10 pips, your buy stop order will activate. If the price continues up to the 20 pip grid, you quickly sell. If, however, the price falls back below the 10 pip grid without first rising to the 20 pip grid, you would sell your position at the same price you bought in order to protect yourself from loss.