Hedged Grid Strategy

Grid trading is a method where positions are not entered all at once but are divided into multiple orders. These orders are typically placed as stop or limit orders around the current price level.

‍
Grid trading resembles the pyramiding strategy, where positions are scaled as the trend moves in the anticipated direction.

‍

Characteristics of the Hedged Grid

The hedged grid is a strategy that leverages market volatility. It is particularly appealing to Forex traders for two main reasons:

1. No Need to Predict Market Direction
       The hedged grid strategy does not require an accurate prediction of market direction to be implemented.
2. Effective in High Volatility and Ranging Markets
       The hedged grid strategy is highly effective in volatile markets with no clear trend, which is a common characteristic of the Forex market.

This document provides specific examples of grid trading setups and explains the conditions under which the hedged grid strategy is effective and its limitations.

Classic Hedged Grid System

The hedged grid consists of both long and short positions. As the name suggests, it includes built-in hedging functionality to minimize or offset potential losses.

Basic Principles

• Losing trades can be offset by profitable trades within the system.
• The ideal scenario is for the entire trading system to reach a net profit, at which point all remaining positions are closed, and profits are realized.

In the hedged grid strategy, the ideal condition is when the price repeatedly oscillates within one side of the grid,triggering multiple orders and achieving their respective take-profit (TP) levels.

The hedged grid works particularly well in"ranging markets" without a clear trend but can also generate profits in trending markets.

The hedged grid strategy is a market-neutral strategy, meaning its profitability is unaffected by whether the price rises or falls.

Grid Configuration – EUR/USD Example

Let’s assume the EUR/USD is currently trading at 1.3500. Below is an example of a grid setup for this scenario:

Grid Setup

• The interval (leg) is set at 15 pips, with 4 levels placed both above and below the reference point.
• The number of levels and intervals can be freely adjusted, and pivot lines or other support/resistance indicators can be used for customization.
• Note: Increasing the interval or adding more levels increases the potential maximum loss.

Buy stop orders are triggered when the price rises above the reference level, while sell stop orders are triggered when the price drops below it. The hedged grid strategy always opens orders in the direction of the trend. Refer to [Figure 1] for details.

Grid Execution

1. Straight-Line Price Movement
    
   • If the price rises by 60 pips, all buy orders are executed, and no sell orders are triggered. In this case, a total profit of 90 pips (45 + 30 + 15) is achieved.
    
   • Conversely, if the price drops by 60 pips, all sell orders are executed, resulting in the same profit of 90 pips.
 
2. Volatile Market Movements
    
   • For instance, if the price drops below 1.3500 and the first sell order is triggered, but later rises to hit the final buy order at 1.3560, the results would align with [Table 2].
    
   • In this scenario, the P&L for some trade pairs is locked in, while the remaining buy orders generate additional profits.

Grid Exit Points

Typically, the grid is closed when the total P&L of all trades reaches a predefined profit target.
For example, if the maximum loss of the hedged grid is -300 pips, the profit target could be set at 350 pips, allowing the system to run its course until the target is achieved.

Alternatively, individual trade pairs can be closed as they reach specific profit levels:

• Advantage: This approach may achieve higher overall profits.
• Disadvantage: Capital and margin may be tied up for extended periods.

Risk Management

1. Calculating Maximum Loss
       When all orders within the hedged grid are executed, the P&L becomes locked, with a maximum loss of -300 pips.
2. Execution Risk
       In fast-moving markets, orders may be executed far from the intended hedged grid levels (slippage), leading to greater-than-expected exposure.

Maximum Profit/Loss

The maximum loss in a hedged grid strategy occurs when all orders are executed, locking in the P&L.
Conversely, the maximum profit occurs when the price moves entirely in one direction, reaching all grid levels.

Testing and Simulation Results

Simulation #1

In an ideal test scenario, the price rises,triggering all buy orders. Refer to [Figure 2].
‍

Simulation #2

The price experiences significant volatility, triggering all grid levels, as demonstrated in [Figure 3].

‍

Advantages and Disadvantages

Advantages

• Systematic profit generation under typical market conditions
• Ability to scale positions as the trend strengthens, maximizing returns
• Profitable in ranging markets
• Easily compatible with automated systems

Disadvantages

• Execution risks in fast-moving markets
• System malfunctions can result in losses if some trades fail
• Limited profitability in strongly trending markets

‍