While researching other Grids, I noticed from their trade history they worked differently to mine. Actually, I really had a lot of trouble finding Grids which traded in both directions all the time, like my proposed strategy. I did find one here http://www.myfxbook.com/strategies/grid-stoch/14597 and if you look at the trade history you can quite clearly see that it opens opposite positions at the same price every time a trade closes out.
Most Grids I found appeared to be directional, like this one – http://www.myfxbook.com/strategies/cg-201001-20121026/26433 – which lead to the discovery of a major flaw in my bi-directional grid.
My initial exposure to Grid’s taught me that a Grid’s strengths arise because we always buy and sell at the same time and as long as it retraces, we make money on the retracement. This is not wrong, it works, and I developed my Grid this way and the testing shows it works. Just to make things clear, I would like to go through the scenario of the price going from 0 to 1 and back to 0, step-by-step, and how we make money off this:
So we ended up with a total +1, and we placed 6 trades in the process. So we can see how entering into positions in both directions makes money… and how I fell into this trap.
Next, hopefully you all know that a Take Profit order or a Stop Loss order is actually just a normal trade entry order in the opposite direction designed to net your position. No brainer right?
Well, doesn’t that mean buying and selling at the same time is just basically the same as stopping out immediately or taking a zero profit immediately? Yes it is, if we ignore the spread!
So let’s go through each step again, but this time we will do it a bit different and take out the unnecessary trades. What we will do is, only place orders buy orders for the grid line below us, and sell orders for the grid line above us.
Again we ended up with a total +1, and the totals at each step are the same, except this is much better because we only opened 2 trades. We only opened 2 trades so that means we only paid the spread twice, instead of 6 times!!
This seems like a much better approach. In conclusion, I believe – and please tell me if you think I’m wrong – we should never buy and sell at the same time in a Grid strategy or perhaps any strategy.
I’m going to try to re-write my Grid accordingly and see how it looks after.