Grid trading is the process of placing automated trades for buy and sell orders in a way that generates profit from the volatility of assets. The process implements advanced algorithms and the grid system.
In grid trading, each grid covers a potential market movement. The idea behind the grid-bot is to place and execute several orders at incremental levels up and below the asset’s current market price.
For example, the grid places different pending buy/sell orders at different distances on the price curve.
How does a grid-trading bot work? The grid-bot places buy/sell orders at a pre-determined price range to form an automated trading grid.
In fact, grid trading is one of those ways that cryptocurrency investors and traders can make their businesses more efficient. In this blog post, we discussed some ways to making crypto trading efficient.
What is the grid trading strategy?
Cryptocurrency prices keep fluctuating around different prices. This makes it complicated to keep up with market prices, especially with wide swings. Thereby, resulting in the possibility of missed profitable opportunities and Fear of Missing Out (FOMO).
In order for traders to navigate between multiple assets and open diverse positions, they need to constantly monitor the price changes. The process of monitoring multiple markets is tedious, which therefore makes grid trading bots the suitable sidekick for traders.
As a trading tool, grid trading enables investors to execute quantitative cryptocurrency trading through a set of different buying and selling prices. The strategy is based on the idea that a crypto asset’s price will fluctuate within a particular price range.
What a trader needs is therefore automate buy and sell orders within this range and take profit from every price swing that takes place in between the range. This up-and-down movement creates a grid area, through which the trading bot constantly trades and takes profit.
Bitget’s managing director tweeted announcing the launch of AI – Grid trading on the cryptocurrency exchange, Bitget.
We're bringing AI to Grid Trading.— Gracy Chen @Bitget (@GracyBitget) July 11, 2023
That's right, you can now choose between 3 earning options depending on your risk appetite.
The upgrade allows more accessibility and is optimized for profits.
Check it out! https://t.co/3pHLLHZAqY pic.twitter.com/GSzaObHvIg
How do grid trading bots work?
Grid trading bots use advanced algorithms to take advantage of the pre-defined grid area. The trader therefore has to customize the right price limits for the bot to operate smoothly. As a result, the bot is able to automate crypto trading using the grid trading style. One major advantage of the grid-trading bit is reducing the effort required to trade manually. Using a grid bot allows traders to optimize their strategy and increase potential profits.
Source: Binance Exchange Grid Trading
Let’s take a look at a practical example when setting up the parameters for trading Ethereum against Tether (USDT).
How To Set Up a Grid-Trading Bot?
Upper and Lower Limits
Let’s say the price of Ethereum has been trading around the $25,000 level for the last 2-weeks. Benson the Trader has $5,000 worth of Tether (USDT) and decided to trade $1000 above and below the $25,000 price level. Therefore having $26,000 at the upper limit and $24,000 at the lower limit when setting up parameters for the grid trading bot.
Step two is dividing the area between the lower limit and the upper limit into grid levels. Different exchanges allow different customization settings. However, all exchanges do come with both manual and automated grid-trading strategies. Manual grid trading bots allow the trader to manually select the grid levels. On the other hand, the automatic mode selects the grid levels automatically. The number of grid levels is the number of buy and sell orders within the grid.
When an asset’s price goes up and crosses the SELL grid, the bot sells the Ethereum and earns a profit. Once the price goes down, the bot buys the dip using the BUY order grid. The process repeats itself depending on the market fluctuations, thereby making a profit for the trader in auto mode.
Remember all the details above are only examples, the market is changing every time. This means traders have to customize parameters depending on market conditions, price history, technical analysis and adequate evaluation of fundamental indicators.
What Are the Benefits of Using Grid-Trading Bots?
- Automated execution: A grid trading bot helps traders automate their trading strategies. This is possible through pre-determined configurations that can automatically execute profitable buy and sell orders without having to manually observe markets and input order details. Traders can also scale their business by implementing multiple grid bots across different trading pairs.
- Adaptability: Grid trading strategies are adaptable to any market conditions. All traders need to do is research different market patterns, conduct thorough risk management to minimize losses and properly configure the trading details as per the prevailing market conditions. Also note that the grids can be short, medium or long-term. Learn more about conducting your own research before investing in the blockchain.
- Usability: Grid trading is straightforward and easy to understand. There are no advanced arithmetics, measurements or even technical indicators. Configuring the parameters is easy and anyone can do so with minimal past experience.
- Quick decision-making: Bots automate the process of decision to give the trading system more precision and high speed compared to a human being. In addition, a bot can trade without being affected by emotions, peer pressure, sentiment trends, FOMO or FUD. This means the bot can perform consistently even during moments of market turmoil or highly volatile conditions.
- Proper risk management: Grid trading bots are programmed to operate under certain risk thresholds. This threshold minimizes potential losses. Additionally, the ability to implement multiple grid bots can help diversify risk across several tradable cryptocurrencies.
Cryptocurrency grid trading generates profits where the parameters are carefully and strategically configured. Not all exchanges or trading platforms will provide the same trade configurations, some might have optional grid limits and grid levels.
However, properly setting up the limits and levels helps execute more rational trades. Below are some important configuration variables you will come across when customising grid trading bots.
The pre-configured price at which the grid trading bot will start its operation. It bears mentioning that any BUY/SELL orders will take place when the market price tests the trigger price. Therefore, it is the trigger price that activates the grid order for the trade to become active.
The stop loss is usually a risk management feature for minimizing losses when a trade is going against expectations. Usually, traders place the stop loss at a price point below the trigger price and the lowest price limit. When the market price tests the stop loss, the bot stops working.
The take profit is the upper price limit and the price point that triggers a SELL order when the position is in profit. Usually, the grid bot sells the base asset and collects the profit at the Take Profit price.
When trading using a grid bot, carefully evaluate the trading fees. Where a trading platform charges high transaction fees, the cost of successfully executing multiple trades might eat up the profits. Always ensure the profits can cover all trading costs and fees.
Grid trading is possible on both spot and futures platforms. A spot trade utilizes the base capital amount in the spot wallet to execute profitable BUY/SELL orders while a futures grid trade utilizes margin so that traders can trade with higher capital than what they already have.
However, it is important to note that a grid-bot might not be effective in other types of trading. For example, trading crypto arbitrage requires MEV bots, which function differently from a grid-trading bot.
Conclusion: Is trading with cryptocurrency grid bots profitable?
Using a grid trading bot saves time, effort and the hustle of having to actively monitor the cryptocurrency markets which are dynamic and quickly changing. A reliable and consistently profitable grid trading bot plays a crucial role in generating consistent trading profits without having to trade manually every day.