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TL;DR
Grid trading automates the buying and selling of futures contracts by placing orders at preset intervals within a configured price range.
Grid trading is effective in markets where prices fluctuate within a specific range, as it can automatically execute trades based on a predefined grid.
This strategy is a good option for traders who want to take a systematic approach to trading and capitalize on market volatility
What is Grid Trading?
Binance Futures offers a strategic trading tool known as grid trading that automates the buying and selling of futures contracts. It is a trading bot that places orders at preset intervals within a configured price range. Grid trading is suitable for volatile and sideways markets where prices fluctuate within a given range, as it aims to profit from small price movements.
How Does Grid Trading Work?
Grid trading is a strategy that involves placing orders at incrementally increasing and decreasing prices above and below a set price level. It is effective in markets where prices fluctuate within a specific range, as it can automatically execute trades based on a predefined grid
For example, using grid trading, a trader could place buy orders for BTC at every 1,000 USDT below the current market price, and sell orders at every 1,000 USDT above the market price
Once a grid trade is triggered, the system divides the asset price range into several grids and sets pending orders for each price level. If the asset price falls, a buy order is executed and a sell order is placed immediately at a higher price. If the asset price rises, a buy order is placed immediately at a lower price. This strategy allows traders to buy low and sell high and as such, capitalize on market volatility.
Advantages of Grid Trading
On Binance Futures, traders can leverage the grid trading strategy to take advantage of market volatility. By doing so, traders can gain access to specific benefits.
1. Automation
By automating the process of buying and selling futures contracts, traders can carry out their trading strategy without making emotional decisions
2. Systematic trading
A trading grid is constructed by systematically placing limit orders at intervals within a pre-established price range.
3. Price change capitalization
Placing orders at pre-defined intervals presents the opportunity to capitalize on small price movements on the market
4. Auto parameters
Binance Futures offers an auto parameters function that allows anyone to create a grid trading strategy with just one click
5. Grid parameter customization
Advanced traders are able to manually adjust and configure grid parameters, which can help profit from a pre-determined price range
6. Access to leverage
Binance Futures allows traders to set their grid trading strategy using leverage. It can be used to make profits in both rising and falling markets by buying low and selling high in an up-trend and selling high and buying low in a down-trend.
How to Use Grid Trading on Binance Futures
Binance Futures grid trading might be new, or confusing, to individuals who have not navigated on the Binance website or app. A step-by-step is provided to help set up a grid trading strategy:
The first step is to log into Binance and access the Binance Futures page. From there, you must choose the [Strategy Trading] option from the drop down menu, and select [Futures Grid].
The following step is to choose the contract on which you want the trading bot to be deployed. In this example BTC/USDT perpetual contract has been selected.
On the sidebar, there will be two different modes one can choose from for grid parameters: “Auto” and “Manual”. The auto mode is selected to use the recommended parameters, whilst the manual mode allows for customization of grid parameters. For this example, manual customization will be explained.
Once manual mode has been selected, the order direction must be decided. On the grid trading panel there are three options for grid direction – Neutral, Long, or Short.
In a neutral grid strategy, the system executes short orders when the price is above the reference point, and long order when the price is below the reference point. In a long grid strategy, the first order placed is a buy order. In a short grid strategy, the first order place is a sell order. For instance, a trader who is bullish on Bitcoin might use a long grid strategy on BTC/USDT
After the grid order direction has been chosen, the grid type must be selected. For this there are two options - arithmetic mode and the geometric mode. The arithmetic mode creates grids with an equal price difference, while the geometric mode creates grids with an equal price ratio difference.
Upon selecting the mode, choose the preferred price range. Specify the price range in which you expect BTC to remain. Suppose that the trader expects the price of BTC to remain between $20,000 and $30,000 for the next 24 hours. With this strategy, the grid trading bot automatically places buy orders at lower prices as the price of BTC drops towards $25,000, and sells orders at higher prices as the price starts to recover, in order to make a profit from the price fluctuations.
The user must then fill in the grid count and specify the number of orders the system must place within the configured price range. The more grids, the greater the number of trades there are. However, the profit from each trade will be smaller.
The final step is to assign an initial margin. The initial margin of a position must be set to help the system determine the initial margin value according to the number of grids, leverage, and price range chosen. Make sure to keep in mind that the more close the grids are, the higher the initial margin.
Closing Thoughts
Grid trading is a great option for traders who want to take a systematic approach to trading to capitalize on market volatility. To ensure profitability, it is important to be selective with the market conditions appropriate for your strategy. Being selective will help you avoid losing money within a trending market.
Furthermore, ensure that proper risk management strategies are in place, including setting an appropriate take-profit and stop-loss order. It is important to take profits, and minimize risks, as you go.