As I briefly mentioned in the previous post, Grid Trading can be done a number of ways and can either lead to great success, or complete failure. So with any implementation there is a major point that needs to be considered – when do we pull the plug on the grid, if at all?
Let the first implementation be called the Restricted Grid. In this implementation, the entire grid has a pre-defined stop loss to minimize losses. If the stop loss is reached, meaning the price has trended too far instead of reverting, all open positions are closed at a loss. If the price did revert and the overall PnL is positive, then we can also close all positions and restart the grid.
Here is an example of a Restricted 100pip Grid on EURGBP for 2010-2011. As you can see, there is a positive trending equity curve – great.
What about the other method – the Unrestricted Grid? In the Unrestricted Grid, the grid is never turned off. This means that orders are re-placed for trades that are closed in profit, and for trades in loss – well they are never closed such that there is no loss ever realized. So how does it look? Below is an example of an Unrestricted 100pip Grid on EURGBP for 2010-2011. It actually has a much healthier equity curve providing consistent returns with no losses.
The two implementations in this case however ended up with roughly the same final equity. Well, that is great but obviously a system with no stop losses like the Unrestricted Grid cannot work forever. So, let’s look at that.
Above shows the testing results for the Unrestricted Grid over the 2008/2009 GFC period. Don’t let that lovely balance curve fool you, the equity curve is lower… a lot lower. Final Balance is $29,756 but Final Equity is $26,478. That’s a $3278 loss we are carrying around but we have secured $1478 profit.
Well that large loss we are carrying around is no good of course – what happened to “Cut your losses early”… Let’s check out the Restricted Grid implementation over the same period.
Well, that’s no good either. The Restricted Grid, with a final equity of $22,831 lost $ 2169! That isn’t really a surprise though is it? After all, we are closing the trades in loss and accepting that loss. The Unrestricted Grid however never closes a loss trade – ever. That’s why we are carrying around this loss. Even still, we ended up on top.
So what’s the catch then? Well, in case you missed it, there was a huge dip (20.7%) in equity in the Unrestricted Grid during the GFC as the market trended strongly. As mentioned in the previous post, Grid Trading’s weakness is trending markets.
So, in this simulation, with a $25,000 account, betting only 1 micro-lot (that’s right, just $1000), we took a 20% drop in equity. Had we been using 5 micro-lots, we would have been margin called.
Now we are in a tough spot. By only betting with 1 micro-lot, we probably aren’t going to make enough money to live off. However, by betting with more we would need a much larger account balance, at which case we probably wouldn’t be doing this. We have to find some way to hedge ourselves…. And so the research continues.