I have seen the hedged grid system been used successfully (and
highly unsuccessfully) over the last few years. Unfortunately the
failures tend to
discourage traders from taking advantage of this great system. I have
found that the failures are mainly due to ignorance, impatience and
reasons for trading failure).
In a nutshell the grid system uses the following methodology.
You start by buying and selling a currency. When the price moves a
(grid leg) you cash in the positive leg, leave the negative leg and buy
and sell again. Sooner or later the system goes positive and you would
then cash in
when it is positive.
This is a brief summary of the content of our free hedged grid
trading course available on expert-4x.com. Please refer to this course
for more details of
how money is made. The attraction is that the system is reasonably
mechanical, can be programmed and does not take much supervision as
orders are used.
Money is made when the price retraces 100%, 50%, 33% at
various levels. This starts looking like a strategy that supports the
Fibonacci concept. The grid
system is also based on the nature of the market to trade sideways 80%
of the time and to trend 20% of the time.
The dangers are that what if the price does not retrace and
continues to trend. The Grid system can not make money in a trending
market — full stop. One
has to realize that. You therefore need Strategies to minimize damage
during these periods:-
Firstly I have found that the biggest mistake made by traders
is that they select a very small grid leg sizes e.g. 20 to 30 pips.
This is a recipe for
disaster. The trick is to use big leg sizes between 150 and 300 pips.
What this does is that it sometimes turns a trending phase into
movement in a
sideways market. I would typically use 300 pips for the GBPJPY and 150
pips for the EURUSD for instance.
Secondly there is no rule that says that the legs have to be
the same size. So I change my leg sizes in trending markets to be even
bigger. If I started
with 150 for the 1st leg I would go to 200 for the 2nd leg and 250 for
the 3rd leg etc. This makes sure that I am carrying less loss making
Thirdly — sometimes it is wise to increase the number of lots
with the trend compared to the numbers against the trend in a good
trend. However be aware
of having the same number of sell and buy transactions. All you will
have done was lock in your current status in a 100% hedge.
Fourthly — This is the biggest change and most important one
that I personally have made in my grid trading strategy. Always cash in
all your transactions
when your system is positive and when the price reaches the end of one
of your grid legs. By cashing in you are reducing the risk of carrying
in a trending market. This also gives you an opportunity to re-assess
the market conditions.
Fifthly:- Cash in a start again is always an option. One of
my strategies is to cash in all my open positions when the 3rd leg of
my grid is reached and
start again. Experience has taught me that this is a short term pain
that goes away very quickly and is soon forgotten.
People that have traded the grid system will immediately see
how the above approaches will reduce the risks of exponential losses
building up in a
strongly trending market. Please feel free to contact Mary McArthur at
firstname.lastname@example.org for clarification on any items discussed
above. She has
numerous examples of successful applications of grid trading
This article is part of a series and many more will follow on Grid trading, money management and Forex Trading Strategies.