A strategy that places multiple buy and sell orders at predetermined price intervals above and below a set price, creating a grid of orders. As price oscillates, trades are triggered and closed for small profits at each level.
Why It Matters
- 1Grid trading is prohibited or restricted by most prop firms because it can accumulate large unrealized losses when markets trend strongly in one direction.
- 2While grid trading works well in ranging markets, a sustained trend can leave multiple positions deeply underwater, quickly breaching drawdown limits.
- 3Firms detect grid trading by looking for systematic order placement at regular price intervals and simultaneous open positions on both sides of the market.
Example
- 1A grid trader sets buy orders every 5 points below the current ES price (4,500, 4,495, 4,490, 4,485, 4,480) with corresponding take-profits 5 points above each entry.
- 2If ES drops to 4,480, all 5 buy orders fill.
- 3The total unrealized loss is $500 + $375 + $250 + $125 + $0 = $1,250 per contract set. If the market continues to drop, losses compound rapidly with each new grid level.
Common Mistakes
- ✖Assuming grid trading is safe because individual positions are small
- ✖Not accounting for the total aggregate risk of all open grid positions
- ✖Using grid trading in a trending market where it performs worst