Algorithmic and Mechanical Forex Strategies | OneStepRemoved

Grid Strategy

by 4 Comments

Grid strategies are common alternatives for traders that do not have an opinion on market direction. They are almost exclusively associated with forex trading. I’ve never seen grid trades in any other context.

The goal of a grid strategy is to outline a ranging or trending bias without committing to the underlying direction. That may sound confusing.

The goal is to only summarize the type of market. Trending conditions prevail in today’s market. If a trader did not know the future direction of the price, he might place stop entry orders a certain distance away from the current market. If the market happens to increase 10 pips, then perhaps that triggers a buy stop order on the expectation of a continuation. Another 10 pips later, another buy order triggers, and so on. The goal is to keep stacking orders on one way moves.

Ranging grids work on the opposite assumption. They use a limit entry instead of a stop entry order. The grid assumes that if the price drifts very far, then it’s likely to come back to where it started.

Problems with Grid Strategies

Position sizing and money management are always some of the biggest concerns with an expert advisor. Two of the more common approaches that I see in grids are either to use a fixed lot size or to use a Martingale approach.

I see merit in the idea of varying lot sizes at different levels. Martingale, however, takes it way too far. It’s a mathematical fact that it will blow up at some point in time. A more reasonable approach is to increase at a very slow rate like 10% as trades become increasingly likely to exit. If a trade is decreasingly likely to exit, the idea of not trading should come to mind. Alternatively, trading smaller sizes is always an option.

The other problem is that grids only work at the moment in time where it’s applied. When a ranging grid expert advisor is placed at the top of a range, the grid will correctly anticipate the market conditions but poorly implement the prediction. The top of the range means that the price falls back down into the middle. The grid, however, assumes it was placed in the middle. The grid buys as the price falls into the mid-range on the errant expectation that it will return to the top of the range.

This is precisely what I dislike about grids. They are totally blind to the context of their current placement. They are best used, in my opinion, in the context of slight directional bias but where outright trades may not make sense.

Breakeven Trailing Stop

by Leave a Comment

The trailing stop that we build in most of our custom expert advisors varies somewhat from the generic trailing stops out there. The code uses two inputs. An input is basically a variable that pops up on the screen when you load the expert advisor. You can change the input value without the need for additional programming.

Expert Advisor inputs tab

This is a screenshot of typical inputs for a MetaTrader expert advisor

The unique aspect of our trailing stop is that it does not trail until the trade reaches a certain amount of profit. Delaying the adjustment allows the user to treat the stop order as a take profit tool instead of simply exiting at a loss.  Most traders feel that once a runner appears, only then does it make sense to adjust the initial rules for exiting at a loss. Acting defensively about the trade only when a decent amount of profit is on the table avoids early stop outs, or at least so the theory goes.

TrailStart is the input which controls when the stop moves from losing to breakeven. It is only at this point of profit that the EA adjusts the exit conditions to avoid a loss.

Say, for example, that the TrailStart is set to activate at 20 pips. That means when your buy trade goes up 20 pips from the entry price, the EA automatically adjusts the stop loss to equal the entry price. The EA cannot lose from that point forward, not counting the effects of slippage.

TrailAmount kicks in only after the stop already adjusted to breakeven. This input controls the distance to increments at which the stop loss should update favorably. If TrailAmount equals 5, it means that the stop loss should adjust in your favor 5 pips for every 5 pips of extra profit beyond the TrailStart at 20 pips.

If the stop loss already moved to breakeven at 20 pips, it means that the stop loss is currently at 0 pips. The trade neither wins nor loses if the market hits the stop. If the price advances another 5 pips (TrailAmount ), the expert advisor determines that it must trail the stop again by 5 pips. The price reaching +25 causes the stop to advance from 0 to +5. When the price moves another 5 pips to +30, the stop advances to +10.

Notice how the stop distance remains a consistent 20 pips in the example. It’s the exact same amount as the TrailStart input.