A grid trading bot, when configured correctly, automatically executes orders to help make profitable trades.
By description, grid trading is a method of quantitative trading that features the placing of automated sell and buy orders aiming to profit from the volatility of cryptos. Grid trading is an algorithmic trading style that automates order execution using grid trading bots.
To set up a grid of orders covering a wide range of possible market movements, this strategy consists of placing multiple orders at incremental price levels below and above the present market price.
Illustratively, the trading bot places the sell/buy orders between the predetermined price ranges creating an automated trading grid. The automation lets crypto traders benefit and make profits on small margins and avoid any emotional decisions. Hence, the trading method increases profitability potential in the bull and bear markets.
What Is Grid Trading?
Crypto markets are highly volatile. Hence, experienced crypto traders rely heavily on the crypto market charts to execute trades. Nevertheless, it can be quite challenging to keep up when the crypto space is dominated by the ‘Wild Wild West’ volatility. Such volatility results in missed opportunities and FOMO sometimes.
For those traders targeting several crypto assets and on different crypto exchanges, things become complicated and continuous monitoring is undoubtedly a tedious task. That is where the grid trading strategy comes in handy as a quantitative crypto trading technique.
Related: Crypto Trading Bots: What is it?
Grid trading assists in selling and buying cryptos in a range that is set by the trader. This strategy is mainly based on the idea that the price of an asset will change within a certain range, and by placing orders at various points within this range, the trader collects profits from the upward and downward price movements.
This fundamentally develops a zone or a grid where the grid trading bot will operate and calculate all the profitable buy-sell orders.
How Do These Grid Trading Bots Work?
Grid trading bots are trading codes or algorithms that try to profit from price changes within the predefined grid zone. The trader creates the parameters and limits for the grid trading bot to work within the preset range and execute orders according to forethought rules. Therefore, grid trading bot orders automate the crypto trading process.
Here is a hypothetical Bitcoin/Tether trade to help explain how a grid trading bot functions and what parameters are considered. It is always advisable to have enough funds in the crypto wallet before setting up the grid.
Set Lower And Upper Grid Limits
Imagine the price of Bitcoin (BTC) has dropped to about $15,000 in the last two weeks. A trader has 5,000 Tether (USDT) and wants to trade $600 above and below the range. This makes $14,400 the lower limit and $15,600 the upper limit.
Set Up Several Grid Levels
The next step involves the division of the interval upper limit price and interval lower limit price into grid levels. Each exchange has its unique rules; nonetheless, automatic and manual settings are available across all the major exchanges. In the manual mode, the trader might choose levels, while in the automatic mode, grid levels are determined automatically.
The chosen grid number is the basis of the amount of sell and buy orders in the grid. In this example, it can be designed in 7 levels. Users can choose and set up as many grid levels as possible.
When the price surges and crosses the Sell grid, the bot sells Bitcoin and makes a significant profit. Consequently, when the price drops in the Buy grid, the bot buys Bitcoin automatically. Selling and buying continue aiming to make profits until the trader stops the bot or the timer eventually runs out.
It is crucial to highlight that all of these parameters are just for reference. Parameters change subject to a person’s investment goals and risk-return trade-off. Furthermore, crypto trading comes with many risks and traders have to learn about all the possibilities before starting grid trading.
Advantages Of Using Grid Trading Bots
Trading cryptos can be tedious and time-intensive. Therefore, automation tools can enable investors to make rational and highly profitable decisions. The bots are beneficial for various reasons:
These bots automatically execute trades according to predetermined rules, which saves time and minimizes emotional decision-making. Traders can also scale their trades by setting up many grids for various coin pairs consecutively.
Bots make a rational decisions more rapidly than traders. Also, the bots are not impacted by emotions, FOMO, market trends, or peer pressure. They maintain their trading rationale even in volatile and erratic market conditions.
Grid trading bots are ideally designed to automatically close trades when some risk thresholds manifest. This helps minimize possible losses. Also, diversification into multiple coin pairs is a renowned and proven risk management approach: “Don’t put all your eggs in one basket.” Using grid trading bots makes it easy to trade concurrently in several pairs.
Is Grid Trading Profitable?
Crypto grid trading methods can generate significant profits when the grid parameters are configured keenly.
While grid limits and grid levels are needed for creating a functional grid trading bot, various terms and settings are optional on many crypto exchanges. But, when used together with grid limits and grid levels, these settings enable trades to set the bots to execute clinical trades. While using these bots, traders need to set the trigger price, stop loss price, and the take profit price.
Another critical aspect to consider when using a grid trading bot is the trading fees. When the trading fees on the exchange are high and the grid trading bot executes many transactions rapidly in a short time, the trading fees may add up rapidly and chew a huge chunk of the profits. Traders need to ensure that the trades generate more profits than the incurred costs.
Grid trading happens in futures and spot crypto trading. Spot grid trading bots generate profits just on the deployed capital because they use spot wallet funds and insufficient funds stop the trade automatically.
Hence, spot trading is safe because traders trade using only their money. On the other hand, futures grid trading bots utilize margin trades and borrow funds beyond the available capital. This lets traders make bigger cryptocurrency trades amid additional risk exposure.