Everything You Need to Know to Start Grid Trading in Crypto

The crypto market is a fertile ground for numerous algorithmic trading strategies. Among these, Grid Trading stands out due to its seemingly simple approach of taking advantage of market fluctuations. This guide will help you to understand Grid Trading in crypto - its potential, strategies, and how to get started.

What is Grid Trading?

Grid Trading is an algorithmic trading strategy that thrives on the volatility of the crypto market. It involves placing multiple buy and sell orders at certain intervals in a pre-set price range. Every time the price of a given pair hits these pre-set intervals, a trade is automatically executed.

The primary aim is to generate profit from fluctuating prices, regardless of the market's general trend. Most often grid trading takes place on a centralized exchange by connecting a third-party algorithm or service through API. The algorithm then automatically generates limit orders on the exchange based on the defined trading strategy.

Grid trading can also be done without an algorithm by manually creating the limit orders, but this approach takes up a lot of time.

Can Grid Trading Be Profitable?

Undoubtedly, Grid Trading can be profitable. The method doesn't require traders to predict market trends accurately but takes advantage of price volatility instead. By setting up a 'grid' of buy and sell orders, traders can earn profits from each transaction within the grid as prices rise and fall.

While Grid trading can be profitable it has its own specific drawbacks, which we will explain further below.

Popular Grid Trading Strategies

Symmetrical Grid

A trader chooses a price range in which they want to trade an asset, let's say ETH, from $1500 to $2000. Our trader then covers this price range with limit orders, which will be automatically executed once the price reaches predefined points.

If the current price of ETH is $1750 the first sell order could be at $1800 and the first buy order at $1700. In this way, limit orders are systematically distributed and executed across the price range. Symmetrical grid involves creating the same number of buy and sell orders, which are equally distanced from each other.

The opposite of a symmetrical grid is an asymmetrical grid, which involves balancing the orders more on the sell or buy side. An asymmetrical grid takes into account speculation that the asset will primarily follow one direction - up or down.

Dynamic Grid Strategy

The dynamic grid strategy contrasts with the static grid strategy by adjusting the grid levels according to market movements. 

If a price trend develops, the grid "moves" with the trend, creating opportunities to profit from sustained price movements in one direction. This strategy requires more active management and may involve using grid trading bots to adjust the grid dynamically.

Price Action Grid Strategy

The price action grid strategy bases its grid levels on price action signals, such as support and resistance levels, Fibonacci levels, or key psychological price levels. By aligning the grid with these potential turning points in the market, this strategy aims to capitalize on significant price reactions.

Fibonacci Retracement on ETH

How to get started?

First and foremost crypto grid trading is popular mainly on centralized exchanges (CEXs) so you have to find a trustworthy CEX if you do not already use one. 

Now you have two possibilities:

• Set up the grid levels manually by yourself - This can be done easily and is the most straightforward option, however, this approach requires constant monitoring and is not much flexible.
• Use automated grid trading platform/bot - The trading algorithm is then connected to your exchange through API and automatically sets the orders according to the selected strategy (3Commas). Alternatively, the algorithm may be integrated directly into the exchange (KuCoin), which allows you to immediately set and deploy it.

Benefits and Drawbacks of Grid Trading in Crypto

Benefits of Grid Trading

1. Profits in Volatile Markets: Grid trading aims to exploit the natural volatility of crypto markets by setting multiple buy and sell limit orders. It can generate profits in both rising and falling markets, as long as the price remains within the grid.
2. No Need for Market Predictions: Unlike many other trading strategies, grid trading does not require accurate market trend predictions. The strategy works by profiting from the price volatility within the grid, regardless of the broader market direction.
3. Automation Potential: With the advent of grid trading bots, it's possible to automate this strategy, enabling traders to execute trades 24/7. This is a significant advantage given the round-the-clock operation of crypto markets.
4. Risk Management: By predefining entry and exit points, grid trading allows traders to manage risk effectively. Also, spreading investments over multiple orders can dilute the impact of any single adverse trade.

Drawbacks of Grid Trading

1. No Profits Outside the Grid: If the market price moves out of the grid range (due to a strong trend or a sudden price spike), the grid trading strategy stops generating profits until the price returns to the grid.
2. Intensive Capital Requirement: To place numerous buy orders, a trader needs sufficient capital. This might be a limitation for traders with a smaller capital base.
3. Overtrading Risks: Grid trading can lead to overtrading due to the high number of transactions. This could increase transaction costs and potentially eat into profits.
4. Need for Monitoring: Although grid trading bots can automate trading, the strategy still requires periodic review and adjustment, especially in the dynamic grid strategy.