USING A GRID TRADING STRATEGY TOOL ON BINANCE FUTURES

10 min readMar 13, 2023

By Favour Nwoko

WHAT IS GRID TRADING

Grid trading is a trading bot that automates the buying and selling of Futures contracts. It is designed to place orders in the market at preset intervals within a configured price range.

Grid trading is when orders are placed above and below a set price, creating a grid of orders at incrementally increasing and decreasing prices. In this way, it constructs a trading grid. For example, a trader could place BTC buy orders at every 1,000 USDT below the market price and place sell orders at every 1,000 USDT above the market price to take advantage of ranging conditions.

Grid trading performs best in volatile and sideways markets when prices fluctuate in a given range. This technique attempts to make profits on small price changes. The more grids you include, the greater the frequency of trades will be. However, it comes with an expense as the profit you make from each order is lower.

Thus, it is a tradeoff between making small profits from many trades, versus a strategy with lower frequency but generates a bigger profit per order.

ADVANTAGES OF GRID TRADING

Traders can leverage the grid trading strategy on Binance Futures to access benefits, including:

Automation: By automating the process of buying and selling futures contracts, traders can carry out their trading strategy without making emotional decisions.
Systematic trades: A trading grid is constructed by systematically placing limit orders at intervals within a pre-established price range.
Capitalize on small price changes: Placing orders at pre-defined intervals presents the opportunity to capitalize on small price movements on the market.
Auto parameters: Binance Futures offers an auto parameters function that allows anyone to create a grid trading strategy with just one click.
Customize grid parameters: Advanced traders can manually adjust and configure grid parameters, which can help you profit from a pre-determined price range.
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?

Here’s how you can set up your grid trading strategy:

1. On the Binance Futures page, choose the [Strategy Trading] option from the menu, then select [Futures Grid].

2. Select your contract pair. The next step is to choose the contract on which you want the trading bot to be deployed. For this example, we’ll use a BTCUSDT perpetual contract.

From the sidebar, you will be asked to choose between “Auto” mode (to use the recommended parameters) and “Manual” mode (to customize your grid parameters). In this example, we will manually customize and set grid parameters.

3. Decide order direction. On the grid trading panel, select the grid direction from three options — Neutral, Long, or Short.

In a neutral grid strategy, the system will execute short orders when the price is above the reference point, and long orders when the price is below the reference point.

In a long grid strategy, the first order placed is a buy order, while in a short grid strategy, the first order placed is a sell order. For instance, a trader who is bullish on Bitcoin might use a long grid strategy on BTCUSDT.

This could involve placing buy orders at different intervals below the current market price, and sell orders at different intervals above the current market price.

4. Choose the grid type. There are two options for constructing the grid — 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.

5. Choose the price range. Specify the price range in which you expect BTC to remain. Suppose you anticipate that the price of BTC will remain between $20,000 and $30,000 for the next 24 hours. With this strategy, the grid trading bot will automatically place buy orders at lower prices as the price of BTC drops towards $25,000, and sell orders at higher prices as the price starts to recover, in order to make a profit from the price fluctuations.

6. Enter grid count. Specify the number of orders you want the system to place within the configured price range. The more grids you have, the greater the number of trades you have; however, the profit from each trade will be smaller. This is essentially a balancing act between making small profits from many trades or making larger profits from fewer trades.

7. Assign the initial margin. The initial margin of the position needs to be set as the system will determine the initial margin value according to the number of grids, leverage, and price range you choose. It’s important to keep in mind that the more close the grids are, the higher the initial margin will be.

HOW DOES IT WORK?

Binance Grid Trading now supports USDⓈ-M and COIN-M Futures. You can customize and set grid parameters to determine the grid’s upper and lower limits and the number of grids. Once the grid is created, the system automatically buys or sells orders at preset prices.

Let’s understand how it works.

You expect Bitcoin to hover in a price range between 50,000 USDT and 60,000 USDT in the next 24 hours. In this case, you could set up a grid trading system to trade within this predicted range.

On the grid trading panel, you could set parameters of the strategy, including:

The upper and lower boundaries of the price range;
The number of orders to be placed within the configured price range; and
The width between each buy and sell limit order.

In this scenario, as the BTC price falls toward 55,000 USDT , the grid trading bot will accumulate buy positions on the way down at a lower-than-market price. As the price recovers, the bot will sell on the way up at a higher-than-market price. This strategy essentially attempts to profit from price reversions.

For more details, please read What Is Long/Short Grid Trading.

WHAT RISK MANAGEMENT STRATEGIES SHOULD YOU BE AWARE OF WHEN USING GRID TRADING?

1. Trading Plan

A trading plan is a must-have for every serious trader. Especially in the highly volatile crypto markets, a trading plan can help you to manage risk better. A trading plan could also help you improve trading consistency and eventually allow you to scale to profitability.

When developing a trading plan, you must include a detailed layout of how you would enter and exit positions, including entry and exit indicators, position-sizing, and stop-loss placements.

The advantages of having a trading strategy are numerous, ranging from lowering stress throughout your trading day to missing fewer trades and becoming more conscious of your trading habits, which helps you to make highly targeted development and treat trading seriously.

Once you have a strategy in place, the next essential step is to stick to the trading strategy, especially in a losing trade. In trading, losses are part and parcel of the game and are completely normal, even for the most experienced professionals. Often, we see new traders abandon their plans once they start losing trades. Sticking to the strategy is a critical aspect of building a good long-term trading record. Whenever you panic and abandon the plan, it’s likely that you will make more off-track trades. Worse, you could even make more trades out of the fury to regain what is lost and eventually losing more.

2. Stop-Loss Orders

The fundamental concept of risk management is to reduce the risk of outsized losses and one of the common methods to minimize losses is by using a stop-loss. A stop-loss is an order that allows an investor to limit the possible loss on an investment by specifying a price limit over which the asset will move.

Assume you purchase 10 BNBBUSD contracts on Binance Futures at $350 each. To minimize the possible loss on this transaction, you could place a stop-loss order at 20% below the purchase price, or $280.

If the price of BNBBUSD falls below $280, your stop-loss order is triggered. The exchange then sells the contracts at the current market price, which may be precisely at the $280 trigger price or substantially lower, depending on prevailing market conditions.

Investors use stop-loss orders as part of their risk management strategy to exit positions if they don’t perform as expected. Stop-loss orders enable investors to make predetermined decisions to sell, which helps them avoid letting their emotions influence their investment decisions.

3. Money Management: Never Risk More Than 5% of Capital Per Trade

Money management is a method for adjusting your position size to reduce risk while maximizing the growth potential of a trading account. It is a strategy to limit the capital placed on any one trade to 5% or less of the account value, never more. The dollar value of that 5% goes up or down as the account value changes, but the 5% limit ensures that you do not overexpose your entire account to one position.

Due to the unpredictability and volatility of cryptocurrencies, it is possible to lose your entire investment capital in minutes when investing in high-leverage derivatives such as perpetual futures contracts. As such, investors should observe a stricter limit; the rule of thumb when it comes to trading in volatile assets is to risk only 1–2% of your capital in a given trade.

For instance, assume you have 10,000 BUSD in your USDⓈ-M Futures wallet. In this case, you would allocate between 100–200 BUSD of risk per trade. Should a trade go wrong, you would only lose 1–2% of capital in your account.

Managing your risk well means having the right position sizes, knowing how to place and move your stop losses, taking into account the risk/return ratio. A robust money management plan allows you to build a portfolio that you won’t lose sleep over.

4. Don’t Over-Trade

Any investor or anyone looking to trade in futures must be careful to make sure they don’t overtrade. Overtrading occurs when you have too many open positions or risk a disproportionate amount of capital on a single trade, exposing your entire portfolio to undue risk. To avoid over-trading, one must adhere to a trading plan and exercise discipline in sticking to the pre-planned strategy.

Most new traders are notorious for over-trading, and more often than not, it is due to the failure to control emotions such as greed, fear, and excitement.

Though traders can profit massively from opening many positions, the losses can be equally devastating. A prudent approach to limit the losses from all your positions is to place a ceiling on the amount of capital you risk at any one time.

If you have 25 positions in your portfolio, for example, and the amount at risk for each position is 1%, it’s conceivable (and almost anything can happen in the crypto markets) that all 25 positions will go against you at the same time and cause a major loss of 25% of your portfolio.

In addition to risk per trade, you should also consider the cumulative amount of risk in your entire portfolio, this is also known as the total capital at risk. As a general rule, your total capital at risk should be less than 10% of your portfolio, which means if you’re risking 1% of your portfolio per trade, the maximum number of open positions is 10.

5. Only Invest What You Can Afford to Lose

There’s one golden investment rule that you should always keep in mind: never invest money that you can’t afford to lose.

When dealing with crypto futures, one prevalent characteristic is volatility. Losing money in a highly volatile market is very easy. The prices can change drastically at any time. Devoting more than you are willing to lose puts you in a tight spot. Therefore, you should only trade crypto futures with excess savings to detach emotions from your investment decisions.

A good trader must be willing to keep their emotions away and operate in a systematic and calculated way. In addition, ensure that you have established a robust risk and money management strategy to protect your capital at all times. Remember to always utilize the rule of thumb of risking 1–2% of your account balance per trade and always brace yourself to make losses to better accept them as part of the futures trading process.

CONCLUSION

Grid trading is a good option for traders who want to take a systematic approach to trading and capitalize on market volatility. To ensure profitability, it is important to be selective with the market conditions appropriate for your strategy. This will help you to avoid losing money in a trending market.

https://www.binance.com/en/strategy/futures/grid/BTCBUSD?ref=425297060