All of the grid strategies we have covered so far have been those that enter the market on movements on the price axis. We call these horizontal or price axis grids. There is another class of grid that Forex traders use called vertical grids. With a vertical grid, the technique involves placing trades at intervals on the time axis rather than the price axis. This is a play on an old investment technique known as dollar cost averaging. The argument goes as follows.
Proponents of the vertical grid strategy argue that trying to time the market by optimizing trade entry points is futile. They put forward the proposition that the market essentially does a random walk at least on the short time horizon and therefore it is impossible to predict short-term price movements in any reliable way.
Instead of trying to time the market at an exact instant, with a vertical grid the trade block is spit into equal sized units and drip-fed at intervals into the market. Using a vertical grid with 5 levels, the trade block is split up into 5 chunks each of size 0. We then enter the market at set time intervals with 5 trades each of size 0. The 5 trades enter at different points or market levels.
Some may be at a higher price, some lower. Overall, the entry price will approximate the average over the time period chosen. The finer we split the trade block, the more closely the average entry price will converge to the average price over that time period. After opening the grid, once the price deviates from the average line in the direction of the trade , the grid is closed at a profit. Importantly the grid trader does not care if one or two trades are in loss, provided the entire system is in profit.
This is the principle of grid averaging. Trends are very commonplace in currency markets on all timescales. Yet often traders find it near impossible to profit from these seemingly predictable escalators de-escalators in price. In a trend, the entry timing of the trade is critical so as not to enter just prior to a sudden correction. In FX this problem is compounded because traders often use very high leverage and cannot afford to ride out a deep drawdown in the trend.
The vertical grid gets around this problem because it virtually guarantees that you will enter the market near to the average. If the average is rising or falling in a downward trend the profits will follow. Suppose we see a rising trend, and decide to take a long position to profit from the upward move.
To capture the trend we can use a vertical aggregating grid. The vertical grid will consist of a six trades each of volume 0. The trades are spaced at equal time intervals, that is an equal number of time ticks apart.
As with other grids, I recommend having one stop loss for the entire system rather than trying to manage each trade separately. Managing each trade individually negates the whole concept of averaging. Figure 2 shows the price chart plotted against the moving average.
The important thing to notice is that with each trade the average entry price of the grid system converges closer to the moving price average. In a rising trend we are then assured of entering close to the average. When the price line rises above the profit threshold at T7 the entire grid is closed with a profit of You might say, why not buy once when the price is exactly at the moving average line? The key difference though is that it would not give the same degree of flexibility.
The grid trader is not fully committed until placing the final trade in the set. On the other hand, the trader entering with a single block trade in one go is fully committed from the start.
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This is a tradeoff in terms of risk versus profit. If the price suddenly rallied before the grid is fully open, the grid trader loses potential profit. Whereas the reverse case is also true.
If the price plummets after some bad economic news, the grid trader can abandon the position before being fully committed, thus taking a smaller loss.
Note also that the time span of your trade entries must be of the same order as the trend you are trading. For example, suppose you were aiming to profit from a trend on the hourly chart. Using a grid with five trades each at five-minute time intervals would be of no use at all. This would only average over a twenty-five minute period. The span of the grid entries needs to be comparable to the cycle of the trend.
So if you are trying to capture a trend on the 1-hour chart for example, your trade entries really need to span several hours. First, decide how many trades you want the grid to be. You could split this block into 10 equally sized units each of 0.
Now if you want to capture profit over a two-day cycle in the trend say, your trade entries need to span at least half of that period. The 10 grid entries can be every 2. Your average entry price will be the average over the hour period.
Generally the more volatile the market, the longer the averaging time span needs to be and the more trades you will need in the grid.
With higher volatility, you need more samples to get a close approximation to the mean price. There are several variations to the vertical grid theme. One that is widely used is called mean divergence optimization. The idea with this is to use times when the price deviates from the moving average line to accumulate or reduce the grid position.
For example, when going long in a rising trend the strategy accumulates the grid position only when the price is below the moving average line and reduces it only when above.
Figure 3 illustrates the idea. This type of grid is often used by trading advisors and is run continuously where it accumulates and reduces the position accordingly. This has the benefit of creating an incremental stream of realized profits. The grid also has a total stop loss whereby the entire system of trades is closed on reaching that limit. The time intervals in a vertical grid do not necessarily need to be constant.
Some traders use time axis indicators to determine the entry time points. One such indicator is the Fibonacci timezone. Fibonacci timezone is a standard chart object in MetaTrader and most other charting packages.
Rather they happen at intervals defined by the Fibonacci sequence. The way it works is to mark out retracement points along the time axis using Fibonacci numbers. These intervals mark likely pivot zones where price reversals could happen.
Using this method the trade timings for the grid are set to coincide with likely pivots in the market. The fib zones can then be extended out into the future to give your grid entry times. The time interval between the grid trades is the sum of the previous two. Next is one hour also. Its important to note that with the fibo variants, in most cases the grid entry price will not converge to the average because the interval size is not constant. The Fibonacci fan fibo fan is another indicator that traders sometimes use to time the grid entries and exits.
Fibo fan is a charting technique that extends support and resistance lines into the future. It works by locating peak and trough pairs. An ascending fan represents a bullish chart. The fan marks lines of support and resistance that the progressing trend will be likely to meet. Traders often use the fibo fan combined with other support and resistance lines to decide if the trend is intact or if it has changed.
Figure 6 shows both fibo fan and fibo timezones. This grid technique would determine where the price is within each time zone and either accumulate or reduce the position accordingly. Whichever technique you use, you will need to have an exit strategy to close the grid when the trend changes course suddenly. With manual trading, visual inspection is often the best route. If you are programming the strategy as an expert advisor, there are several indicators available to help with this. In this case the grid is closed out before losses increase.
Figure 8 shows an example. Here, the support at the bottom of the fibo fan has broken and the price has descended into a new bearish trend. Vertical grids work well in trending markets.
They are a play on dollar cost averaging as they aim to achieve an average entry price over a certain time interval. Thereby the trader has a higher chance of being able to profit from a rising falling trend which in the short term may be highly volatile.
Used appropriately, grids are not profit multipliers, but rather a way of reducing timing risk in volatile markets. I have not understood if your grid-time system has any tp. Do you have a comulative one or a single grid tp? Yes there is a TP.More...