What is a grid trading bot and how to use it?
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Grid trading is a quantitative trading strategy that places automated buy and sell orders to profit from cryptocurrency volatility. Grid trading is a type of algorithmic trading that automates order execution through the use of grid trading bots.
To create an order grid that covers a range of potential market moves, this method involves placing numerous orders at incremental price levels above and below the current market price.
Generally, the trading bot places buy/sell orders between a predetermined price range and builds an automated trading grid. This automation allows crypto traders to capitalize on even small price swings and make profits and avoid making emotional decisions, increasing the potential for profitability in both bull and bear markets.
This article explains what grid trading is, how grid trading bots work and the benefits they bring to traders.
What is grid trading?
The price of cryptocurrencies fluctuates; Therefore, experienced cryptocurrency traders rely on crypto market charts to make trading decisions. However, it can be difficult to keep up when cryptocurrency prices fluctuate wildly, leading to missed opportunities and sometimes market FOMO. For traders who trade multiple crypto assets and on multiple cryptocurrency exchanges, things get complicated and constant monitoring becomes a difficult task.
This is where the grid trading strategy can come in handy as a quantitative crypto trading method. Grid trading helps buy and sell cryptocurrencies within a range set by the trader. The strategy is based on the idea that the price of an asset will fluctuate within a certain range, and by placing orders at different points within this range, the trader can make profits from both the upward and downward movement of the price. This essentially creates an area or grid in which the grid trading bot operates and calculates profitable buy and sell orders.
Related: Cryptocurrency Investments: The Ultimate Crypto Trading Indicators
What are grid trading bots and how do they work?
Grid trading bots are trading algorithms or codes that try to make profit from price changes within the predefined grid range. The trader sets up the parameters or limits for the grid trading bot to operate within the predefined range and execute orders according to the predictive rules. Thus, grid trading bot orders automate crypto trading.
Let’s take a hypothetical Bitcoin/Tether trading example to understand how a grid trading bot works and what parameters are taken into account. It is important to ensure that sufficient funds are available in your wallet before setting up the grid.
Set upper and lower grid limits
Let’s imagine the price of Bitcoin (BTC) has approached the $15,000 mark in the last two weeks. The trader has 5,000 tether (USDT) and decides to trade $600 above and below the range. That makes $15,600 the upper limit and $14,400 the lower limit.
Create multiple raster layers
The next step is to divide the interval cap price and interval floor price into grid levels. Every exchange has its rules; however, manual and automatic settings are available on all major exchanges like Binance, Crypto.com, ByBit, etc. In manual mode, the trader can select levels, and in automatic mode, grid levels are determined automatically.
The grid number selected is a determinant of the number of buy and sell orders in that grid. So in this example it is set to 7 levels. You can select and create as many raster layers as you like.
This results in the following predefined limit, within which the grid trading bot now works.
When the price goes up and crosses the sell grid, the bot sells BTC and makes a profit. Similarly, the bot will automatically buy BTC when the price goes down on the buy grid. The buying and selling will continue with the goal of making a profit until the trader stops the bot or the timer runs out.
It is important to note that all the above parameter settings are for reference only. The parameters can change depending on the investment objectives and the risk/return ratio. Additionally, crypto trading comes with risks and traders need to familiarize themselves with all the possibilities before setting up grid trading.
Benefits of using a grid trading bot
Trading cryptocurrencies can be time-consuming, and automation tools can help investors make better, more rational, and profitable decisions. Crypto grid trading bots are beneficial for the following reasons:
Automated Trade Execution
Grid trading bots can execute trades automatically based on predetermined rules, which can save time and reduce emotional decision-making. Traders can also scale their trades by creating multiple grid trading bots for different coin pairs at once.
Faster and rational decision-making
Bots can make decisions faster than traders. Furthermore, being unaffected by emotion, FOMO, peer pressure or social media trends, they are able to maintain their trading logic even under unpredictable and volatile market conditions.
risk management
Grid trading bots can be programmed to automatically close trades when certain risk thresholds are reached, which can help minimize potential losses. Additionally, diversifying trading across many coin pairs rather than trading a single pair is a well-known risk management strategy: “don’t put all your eggs in one basket.” Using grid trading bots makes it easier to trade multiple pairs at once.
Related: Are Crypto Trading Bots Legit?
Is the grid trading strategy profitable?
Crypto grid trading strategies have the potential to generate profits if the grid parameters are carefully configured.
While grid limits and grid levels are mandatory for setting up a grid trading bot, the following terms and settings are optional on most cryptocurrency exchanges. However, when used in conjunction with Grid Limits and Grid Level, these settings help make more clinical trades.
Trigger Price: This is the preset price at which the grid trading bot will start operating. There is no buying/selling activity until the market price reaches the trigger price. Once the market price and the trigger price are equal, the bot is triggered and the grid becomes active for trading.
Stop Loss Price: As the name suggests, this is the point where the trading grid bot will automatically close all positions to protect itself from a heavy loss. The stop-loss point is below both the lowest price limit and the trigger price. This facility protects the trader because if the market price falls below the stop-loss price, the trading grid stops working.
Take Profit Price: This is higher than both the price cap and the trigger point. When the market price reaches the Take Profit price, the bot sells the base cryptocurrency, collects the profit and exits automatically.
Another important aspect to consider when using a grid trading bot is the trading fees. When trading fees are high on the exchange and the grid trading bot executes multiple transactions quickly in a short period of time, the trading fees can add up and eat away at the overall profit. You have to make sure that the trades generate more profit than the costs incurred.
Grid trading occurs in both spot and futures crypto trading. Spot grid trading bots generate profits only with invested capital as they use spot wallet funds and insufficient funds will automatically stop trading. This makes spot trading relatively safer as trading is done solely with your own money. Futures grid trading bots use margin trades and can borrow funds in excess of the available capital. This allows traders to make larger crypto trades amid added risk.
