Grid, Martingale, and Hedging are three of the most used strategies by Forex Expert Advisors as well as for manual trading. Different variants of Grids, Martingale and Hedging have been used by automated trading systems in recent years to produce consistent profits for traders who use them. This article aims to explain the nitty-gritty of the three concepts in an easy to understand fashion.
The Grid trading strategy involves using a technique that seeks to generate a profit on the natural movement of the market, positioning both buy stop orders and sell stop orders in the process. It is usually performed at a predefined market distance, taking “take profit” as a present size with no stop loss. Trading using a Grid, allow us to know the direction of the price move. It also results in complex money management conditions and increases the margin of error as traders must manage multiple markets at the same time.
To effectively use the Grid system in forex, a trader must first know about the current market dynamics as well as have a complete idea about the market’s fundamentals. Traders hence use the grid system in automated forex trading platforms to remove the rigors associated with manual trading. It eliminates the need for predicting the market’s direction, allowing traders to generate returns even in the most volatile market conditions.
When using the grid strategy, it is important for the trader to use a broker with no trading commissions, as limitations such as these can limit the maximum levels of the grid system. Grid trading can work in trending markets as well, with the trader required to keep the available margin in mind at all times.
Martingale is another trading strategy used extensively by many Forex Expert Advisors in existence. It is a negative progression system that involves a trader increasing his/her position after suffering a loss. It involves doubling up a trader’s trading size after they lose a trade. A trader trying to trade an outcome with a 50 % probability of it occurring, can be considered as a classic scenario for a Martingale progression. Thus, the main theory involves regaining what a trader has lost by doubling up his/her trading loss.
Applying a Martingale strategy will result in several small wins most of the time, with a catastrophic loss once in the middle. Martingale strategies tend not to work when there is a string of losing trades, as doubling up after each loss may result in an unimaginably huge trading size.
One of the prime reasons that the martingale strategy tends to be successful in forex is the nature of currencies. Unlike stocks or commodities, currency pairs do not drop to zero. This is because countries cannot go bankrupt the same way as companies can. Thus, even if a currency is devalued and experiences a sharp decline, it still does not reach zero. Astute traders using Martingale tend to trade currency pairs whose currencies have a high-interest rate.
Hedging when used in the forex market as a strategy can protect a trader’s position in a currency pair from a sudden adverse move. It is used mainly as a form of short-term protection when traders get concerned about an event triggering volatility in various currency markets. Normally, there are two main strategies of hedging when dealing with forex.
The first strategy involves placing a hedge by taking an opposite position in the same currency pair. This is achieved by holding both a short as well as a long position on the currency pair at the same time. As this strategy eliminates all the risk associated with the trade while the hedge is active, it is known as the “perfect hedge”.
The second strategy involves creating a hedge for the partial protection of an existing position from an undesirable forex move. This is done usually using forex options. Since this strategy only eliminates a part of the risk and not the whole, it is known as an imperfect hedge.
The forex market has seen an influx of automated trading applications such as forex robots and expert advisors. Traders, especially novice ones are attracted to this market with the promises of generating consistent profits. The three concepts of Grid, Martingale and Hedging when implemented properly can be advantageous both in automatic trading as well as in manual trading.
However, it should be mentioned that a trader should have a fundamental idea about the strategies he/she is using before starting to trade, especially when using Expert advisors. There have been instances where some strategies are not compatible with the market conditions, producing negative, sometimes disastrous results for the traders involved. Thus, gathering knowledge about the above three strategies should be the priority before applying them in a real-time trading environment.