What Is a Grid Trading Bot and How to Use It?
Grid trading bot 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.
What Is Spot Grid Trading and How Does It Work?
Spot grid trading is 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.
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 world wild.
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!
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.
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!).
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