In this article you will learn some history behind the grid trading strategy, how does it work, and what market conditions are favorable to run this strategy.
Originally, this strategy mostly used in Forex, but it found its way to the cryptocurrency market when it started to fluctuate. Nevertheless, it is essential to know the fundamentals so you understand well when it is the perfect time and place to use it.
In short, the grid strategy works with postponed limit buy and sell orders in predefined price intervals. The price range you choose will be divided into multiple levels (also selected by you) which creates a grid full of orders. This is why we call it The Grid Strategy.
All orders are allocated at both above and below the current price. In general, buy orders are placed below the current price, while sell orders are always placed above the current price.
It would be very time-consuming if this strategy is utilized manually, and this is where our bot comes in handy. The main purpose of this automation is to keep generating profit from any market movement while you are offline. We do it by having all orders interchangeable.
Interchangeable means that for every completed buy order, we will create a new sell order above the executed price, and vice versa. This feature gives you a significant advantage where you don't have to restore your grid orders manually. Everything will be managed for you by the Bitsgap platform!
For presentation purposes, we pick the classic BTC/USD trading pair and show you how grids are generated and what will happen if the price goes up or down along the grid.
The very first parameter we need to set up is the price range - the range where you will allow the bot to trade. After we need to decide on the number of grid levels where we want something to happen.
In our example, the Bitcoin price has a clear pattern moving between $6,250 and $8,000. After running backtesting with different grid quantity settings, we have noticed that 8 grids setup gives the best results - so let's work around these numbers!
Here are our final parameters:
- Lower price 6,250 USD
- Upper price 8,000 USD
- Grid quantity 8
Bot is created
When we create the bot, we take the price range and divide it into 8 parts (grid quantity) - this is where we will execute all of our orders. Since we start at $7,000 we will not place any order at this grid. A new order will be placed thereafter when any of the closest grid orders get completed.
Now we have a perfect set of 7 open orders (3 open orders to buy and 4 open orders to sell)
Price moves up
When price moves up and meets our open order at $7,250 it gets completed and then a new order to buy is placed on the grid below at $7,000.
Your profit from this transaction is $250 is added to your available balance and will not be used for further operations, this is your final earning from this particular trade.
Here is an example of how this will be recorded in your Bot profit:
+ $7,250 from a Completed sell order
- $7,000 to Open new buy order
= $250 to the Available Balance (bot profit)
But now our grid is changed to 4 open buy orders and 3 open sell orders.
Price moves down
When price moves down your open buy orders will be completed and new sell orders will be placed above them.
In our example below, we have already filled two buy orders at $7,000 and $6,750. Now you have more Bitcoin to sell in future if the price will go up again.
There is no loss or gain for the balance of your quote currency but now you have more base than you started with. Here is a more detailed explanation of what exactly happened:
- $7,000 to Complete buy order
= Bitcoin to Open new sell order at $7,250
- $6,750 to Complete buy order
= Bitcoin to Open new sell order at $7,000
With 5 open sell orders and 2 open buy orders now we need to wait for the price to come back.
It may look like the balance of your quote is drained but remember that we have that Bitcoin in open orders we purchased. The method is to accumulate more base to sell in the future for profits. When the price will move up again and hit our $7,000 and $7,250 grid levels - you will earn $250 from each trade.
And all these trades will be cycled as long as the bot operates in your price range. If the price goes above or below your settings, then the bot becomes idle and will be waiting for the price to get back.