How to trade the Forex Grid system. A detailed introduction on how hedging trades create gains

Summary

In this video, Alex Du Plooy from Expert4x introduces the grid trading system, a method for trading currencies without relying on market direction. The system involves establishing a grid size, buying and selling at the start level, and entering trades at each new grid level as the price moves. It emphasizes risk control by not trading past the fourth level and cashing in profits at various retracement points. The video also discusses the system's strengths, including its mechanical nature and low supervision, and its potential weaknesses, such as the need for patience and the appearance of complexity for new traders.

Takeaways

• 😀 The grid trading system is a method that involves buying and selling the same currency simultaneously to take advantage of market fluctuations without predicting the direction.
• 📏 The system requires establishing a grid size, such as 200 pips in the example provided, which determines the distance between grid lines.
• 🔄 The grid system operates by entering a buy and a sell at the start level and then repeating this process at each new grid level as the price moves.
• 💰 The system aims to cash in on positive transactions while letting negative ones continue until they can be closed at a breakeven point or a profit.
• 📊 Grid trading can be used with any investment that has a random and range-bound nature, including forex, stocks, and indexes.
• 🚫 The grid system does not use stop losses and is hedged or partially hedged, relying on the market's natural wave movements rather than predicting price direction.
• 🔄 It's an investment system rather than a trading system, with transactions potentially taking weeks due to the size of the grid.
• 🛠 The grid system is highly mechanical and can be automated, requiring minimal supervision once set up.
• 📉 A potential weakness of the grid system is its initial complexity and the need for a paradigm shift for traders accustomed to traditional trading rules.
• 💡 Risk management is crucial; Expert Forex recommends not trading beyond the fourth grid level to prevent significant losses during strong trends.
• 🌐 The grid system can handle large trends and is not significantly impacted by them, as long as traders follow proper risk management and cash in profits during market consolidations.

Q & A

What is the grid trading system discussed in the video?

The grid trading system is a trading strategy that involves setting up a grid of predetermined price levels and buying and selling a currency pair at the same time, without predicting the market direction. It uses a series of buy and sell orders to capitalize on market fluctuations within a set grid size.

What is the first step in setting up a grid trading system according to the video?

The first step is to establish a grid size for your trading. In the example given in the video, a grid size of 200 pips is used, meaning the gaps between the grid lines are 200 pips apart.

How does the grid trading system handle market direction?

The grid trading system does not rely on the direction of the market. It involves buying and selling the same currency at the same time, which means the trader is hedged and does not need to predict the market's direction.

What happens when the price moves by the grid size in the grid trading system?

When the price moves by the grid size, it reaches the next level of the grid. At this point, the trader enters a new buy and sell order at that level, and cashes in the positive transaction from the initial trades.

What is the purpose of cashing in the positive transactions in the grid trading system?

Cashing in the positive transactions allows the trader to realize profits from the grid trading system. It is part of the strategy to accumulate gains while leaving the negative transactions open to potentially break even or turn positive as the market moves.

What is the recommended approach for risk control in the grid trading system?

The video recommends not trading past the fourth level of the grid to control risk. If the market trends strongly in one direction, it's advised to take the loss at the fourth level and start the grid trading process again.

How does the grid trading system handle drawdowns or losses?

The grid trading system can incur drawdowns if used inappropriately, such as in a strongly trending market with an unsuitable grid size. However, the strategy includes cashing in profits more frequently than losses, which can help offset drawdowns.

What is the significance of the 100% retracement move in the grid trading system?

The 100% retracement move is a profit-making opportunity in the grid trading system where the market price moves up to the next grid level, and then back to the starting level, allowing the trader to cash in both the buy and sell transactions for a profit.

What is the 50% retracement move and how does it work in the grid trading system?

The 50% retracement move is another profit-making opportunity where the market price moves up two grid levels, and then back to the first level. This allows the trader to cash in multiple transactions, resulting in a net profit.

How can the grid trading system be automated?

The grid trading system is highly mechanical and can be automated using a trading platform or software that supports the execution of pending orders, which are used to implement the grid strategy.

What are the key strengths of the grid trading system mentioned in the video?

The key strengths of the grid trading system include the absence of stop losses, no directional bias, and its mechanical nature requiring low supervision. It can be easily automated and is suitable for various investments that exhibit random and range-bound behavior.

What are the potential weaknesses or challenges of using the grid trading system?

The potential weaknesses include the system appearing complex and illogical initially, requiring a paradigm shift for traders used to traditional trading rules, and the possibility of incurring losses if used in a strongly trending market with inappropriate grid sizes.