Grid trading is a quantitative trading strategy that involves placing automatic buy and sell orders in an attempt to profit from the volatility of cryptocurrencies. Grid trading is a style of algorithmic trading that automates order execution using grid trading bots.
To create a grid of orders covering a range of potential market moves, this method entails placing multiple orders at increasing price levels above and below the current market price.
Typically, a trading bot places buy/sell orders within a predetermined price range, creating an automated trading grid. This automation allows crypto traders to capitalize and profit from even small price fluctuations and avoid emotional decisions, thus increasing the profit potential in both bull and bear markets.
This article explains what grid trading is, how grid trading bots work, and their benefits for traders.
What is network trading?
The price of cryptocurrencies fluctuates; therefore, experienced cryptocurrency traders rely on the cryptocurrency market charts to make trading decisions. However, it can be difficult to keep up when cryptocurrency prices fluctuate wildly, leading to missed opportunities and sometimes market FOMO. For traders trading multiple crypto assets and multiple cryptocurrency exchanges, things get more complicated and constant monitoring becomes a challenge.
This is where the grid trading strategy can be useful as a method of quantitative cryptocurrency trading. Grid trading helps to buy and sell cryptocurrencies within the range set by the trader. The strategy is based on the idea that the price of an asset will fluctuate in a certain range, and by placing orders at different points of this range, a trader can profit from both upward and downward price movements. In essence, this creates an area or grid in which the trading bot will work and calculate profitable buy-sell orders.
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What are grid trading bots and how do they work?
Grid trading bots are trading algorithms or codes that attempt to profit from price changes within a pre-defined grid area. The trader sets parameters or limits for the grid trading bot so that it operates within a predetermined range and executes orders in accordance with the rules of foresight. Thus, the orders of network trading bots automate crypto trading.
Let’s take a hypothetical Bitcoin/Tether trading example to understand how the grid trading bot works and what parameters are taken into account. Before setting up the grid, it is important to make sure that you have enough funds in your wallet.
Set upper and lower grid limits
Let’s imagine that the price of Bitcoin (BTC) has approached $15,000 in the last two weeks. The trader has 5,000 Tether (USDT) and decides to trade $600 above and below the range. This amounts to $15,600 for the high price limit and $14,400 for the low price limit.
Create multiple grid levels
The next step is to divide the price of the upper limit of the interval and the price of the lower limit of the interval into grid levels. Each exchange has its own rules; however, manual and automatic settings are available on all major exchanges such as Binance, Crypto.com, ByBit, etc. In manual mode, a trader can select levels, while in automatic mode, grid levels are determined automatically.
The selected grid number determines the number of buy and sell orders in this grid. So in this example it is set to 7 levels. You can freely select and create as many grid levels as you need.
This will lead to the next predefined limit within which the network trading bot will now function.
When the price rises and crosses the Sell grid, the bot sells BTC and makes a profit. Similarly, when the price drops in the Buy grid, the bot will automatically buy BTC. Buying and selling continue for profit until the trader stops the bot or the timer expires.
It is important to note that all of the above parameter settings are for reference only. The parameters may vary depending on the investment objectives and the ratio of risk and return. Moreover, crypto trading comes with risks and traders should familiarize themselves with all the possibilities before setting up online trading.
Benefits of using a grid trading bot
Trading cryptocurrencies can be time consuming and automation tools can help investors make better, smarter and more profitable decisions. Crypto Grid trading bots are beneficial for the following reasons:
Automatic trade execution
Online trading bots can automatically execute trades based on predefined rules, which can save time and reduce emotional decision making. Traders can also scale their trades by creating multiple online trading bots for different coin pairs at the same time.
Faster and Smarter Decision Making
Bots can make decisions faster than traders. Also, since they are not affected by emotions, FOMO, peer pressure, or social media trends, they can maintain their trading rationale even in volatile and volatile market conditions.
Management of risks
Grid trading bots can be programmed to automatically close trades when certain risk thresholds are reached, which can help minimize potential losses. Also, diversifying trading across multiple coin pairs instead of trading a single pair is a well-known risk management strategy: “Don’t put all your eggs in one basket.” Using network trading bots makes it easier to trade multiple pairs at the same time.
Are cryptocurrency trading bots legal?
Is the grid trading strategy profitable?
Crypto grid trading strategies can be profitable if the grid parameters are carefully tuned.
While grid limits and grid levels are required to set up a grid trading bot, the following conditions and settings are optional on most cryptocurrency exchanges. However, when used in combination with grid limits and grid level, these settings help you make more informed trades.
Trigger Price: This is a pre-set price at which the trading bot will start trading. No buying/selling activity will occur until the market price reaches the trigger price. As soon as the market price and the trigger price match, the bot is triggered and the grid becomes active for trading.
Stop Loss Price: As the name suggests, this is the point at which the trading grid bot will automatically close all positions to guard against big losses. The stop loss point is below both the low price limit and the trigger price. Setting this up will help protect the trader because when the market price drops below the stop loss price, the trading grid will stop working.
Take Profit Price: Above both the upper price limit and the trigger point. When the market price reaches the take profit price, the bot will sell the underlying cryptocurrency, collect the profit and automatically stop working.
Another important aspect to consider when using a grid trading bot is the trading fees. If the trading fees on an exchange are high and the network trading bot quickly completes multiple transactions in a short period, then the trading fees can accumulate and eat into the overall profit. You need to make sure that, overall, the deals bring in more profit than the costs incurred.
Grid trading occurs in both spot and futures trading of cryptocurrencies. Spot grid bots only profit from the capital involved as they use the spot wallet funds and a lack of funds will automatically stop trading. This makes spot trading relatively safer as it is traded entirely with your own money. Bots for trading the futures grid use margin trades and can borrow funds in excess of available capital. This allows traders to make larger crypto trades at additional risk.
Credit : cointelegraph.com
