What Is a Grid Trading Bot and How to Use It?
Crypto Basics

What Is a Grid Trading Bot and How to Use It?

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Created 1w ago, last updated 1w ago

Today, we discuss grid trading bots and how you can use them to your advantage.

What Is a Grid Trading Bot and How to Use It?

Table of Contents

Grid bots are used to automate the trading process. By using a grid, users can trade a range with very little effort. Grid trading bots allow you to make money in tight ranges and avoid emotional decisions.

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What Is Grid Trading?

Grid trading automates the buying and selling of cryptocurrencies by following rules set by the trader. It allows you to select an area where the trading bot will execute buy and sell orders. When the price drops to the lower limit of the area, a buy order is executed, whereas the trading bot will sell when the price rises above the upper limit. This way, traders can easily take advantage of a ranging environment.

In the below example, the price of Bitcoin ranges between $30,000 and $20,000. The seasoned grid trader, Pete, would set a lower limit slightly below $20,000 and an upper limit slightly above $30,000. When the price dips to the lower limit, the grid bot automatically buys Bitcoin.

After a while, when the price reaches the upper limit( slightly above $30,000), the grid bot unloads the position, generating Pete a decent profit.

Traders can even tell the bot to scale in and out of positions incrementally. The grid can work the other way too, opening a short position at the highs, and closing this at the lows.
As you can probably tell, this strategy can make traders a significant amount of money, so long as the market trades within a range. It is recommended to use stop losses when trading with grids, as a range breakout can result in sharp moves in price.

Benefits of Using a Grid Trading Bot

One of the main benefits of using trading bots is that it allows you to trade very systematically. After setting the conditions, the bot will simply execute the strategy without giving it a second thought.

This is especially beneficial for beginner traders, as the grid trading bot cuts away emotional responses to volatility and helps you to enter positions even when sentiment goes the other way.

Using a trading bot also allows you to take time away from the markets without sacrificing trading profits. It will happily trade for you any minute of the day without you having to monitor the markets.

Grid bots are perfectly suited for ranging environments, which happens to be the most common market environment out there. Contrary to popular belief, markets spend more time consolidating than trending. With a grid bot, you can take advantage of this!

Key Things to Consider Before Running a Grid Trading Bot

Grid trading can be incredibly profitable, but it is important to remember that every range eventually breaks. As a grid bot trader, you must be prepared for this situation. Have a plan for when a breakout inevitably happens, and use proper risk management techniques to protect your capital!

Running a trading bot allows you to take some time away from the market, but it is not exactly a set-and-forget tool. You need to monitor the market in some way to adapt to changing environments and move around your grid depending on price action.

Trading fees are another key factor to consider when running a trading bot. Especially when you operate your grid trading bot on the lower timeframes, it will take many trades in rapid succession. The fees of trading high frequency can rack up quickly. You need to make sure that the profits of your trades are larger than the fees you pay.

Important Grid Trading Parameters

No matter which grid trading platform you use, most of them are structured very similarly. They need a certain parameters to operate. Let’s check what those parameters are!

  • Take Profit: This is the point where the grid will automatically close all positions for profit. Setting this up will help you lock in profits from your trading strategy.
  • Stop Loss: This is the point where the grid will automatically close all positions for a loss. Setting this up will help you protect your capital when a market goes against you.
  • Upper Limit: The upper limit is the top area of your grid. The trading bot will not execute regular orders above this limit.
  • Lower Limit: The lower limit is the bottom area of your grid. The trading bot will not execute regular orders below this limit.
  • Grid Number: This number is the amount of buy and sell orders in your grid. For example, if your grid number is 20, the grid will have 10 buy orders and 10 sell orders.

Popular Crypto Grid Trading Bots and Platforms

There are various crypto grid trading platforms - all with unique features. Today, we look at the four popular ones, highlighting the key differences among them.

KuCoin

KuCoin was one of the earlier crypto exchanges to launch grid trading. Offering both crypto futures and spot trading, this grid trading service works for many kinds of traders. Since KuCoin lists many altcoins in their ealy stages, this exchange is perfect to take advantage of the early days of new altcoins.

Binance

As the largest exchange on the block, Binance too offers spot and futures grid trading. A unique feature of Binance is how they divide the price range from lower to upper limit. Binance’s grid trading tool has two different modes: arithmetic and geometric. In arithmetic mode, the grids is divided by an equal price difference, whereas the geometric mode splits the grid using an equal price ratio.

Without getting into the complicated maths, these two different methods of dividing the grid unlock different profit-taking strategies that can boost your trading strategy.

Huobi Global

Huobi Global has developed a system that is well-suited for the newest traders on the block. Their grid-trading service comes with automatic parameter recommendations based on the analysis of historical data. By using these recommendations, a trader only needs to set the investment amount.

Alternatively, users can even choose to copy the best-performing grid traders (also known as copy trading).

ByBit

Bybit has recently launched its spot trading bots, with futures bots still being developed. With Bybit’s feeless spot trading (at the time of writing), this bot is a great tool to generate profits, even in tighter ranges.

What Is Spot Grid Trading and How Does It Work?

Spot grid trading is – as the name suggests – a version of grid trading where traders only take spot trades. Spot trading is a relatively safe way to trade, as you trade solely with your own money. This means you can only buy as much as you can afford, and nothing more. This makes it impossible to get liquidated.

In spot grid trading, the bot will buy and sell spot positions at predetermined levels, generating profits on the capital deployed.

What Is Futures Grid Trading and How Does It Work?

Futures grid trading is a version of grid trading where traders can use margin and trade bigger positions. With margin trading, traders can borrow funds to take on positions beyond their own capital. Because of these larger positions, traders can generate more profits. This brings extra risk, as margined trades can get liquidated.

In futures grid trading, the bot will buy and sell positions, generating larger profits (or losses!).

What Could Go Wrong With Grid Trading Bot?

One of the biggest problems in grid trading is that traders may underestimate how clinically the bot will execute trades. Even when the strategy is consistently unprofitable, the bot will continue to run until it is stopped manually, or when it runs out of funds. Therefore, the trader will still need to pay attention to the market to determine if they still want to operate the grid.

Markets are dynamic, so running a fixed-parameter bot  for a long time isn’t profitable. They are a great tool to capitalize on ranging environments, but a trader must be prepared for that environment to end.

Successful Grid Trading Strategies

The best way to deploy grid trading strategies is when the market is in a consolidation range. For example, at the time of writing this article, the market is anticipating the FOMC rate hike decision. Volatility is lower than normal, as traders wait to position until the decision is out.

As a result, the market traded in a 0.41% range for most part of the day. Grid trading strategies can help you capitalize on these tight ranges, so long as you don’t forget to turn it off before the rate hike decision is announced.

Closing Thoughts

This concludes our article on grid trading bots, their benefits, and the relevant strategies. Grid trading is mostly profitable in ranging environments.

As always, it is important to do your own research before investing your hard-earned money. Never invest more than you can afford to lose!

Writer’s Disclaimer: This article is based on my limited knowledge and experience. It is for educational purposes only. It should not be construed as advice in any shape or form.

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