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Here is something I wrote today for some beginners. It may help with the "where do I start" question.
CheckGrid step-by-step
Somehow it assumed that one can just jump in and start trading the checkgrid without education, effort and time. It doesn't work that way - most things in life don't. So, what are the steps?
1. Understand the concept. That you've read it is NOT good enough. You MUST be able to take out a pencil and paper and explain it to someone. It is NOT hard, but it does take effort. Read my pdf file for a basic explanation of the concept. Make notes on it and use it to ask questions of the senior members of this forum. Study the answers and pencil them out before asking again.
2. Understand the risks. What happens if the market moves against you? Can you calculate EXACTLY what your drawdown risk is on a 100 pip negative move? How about 200? 400? I will give you the math in another post. Learn it.
3. Choose a currency to trade. Ask others why they selected a currency for their trading. "Because" is not an answer. Learn the reasons why they chose a currency. Make sure YOU have reasons why you selected a currency.
4. Choose a step size and order size. This affects the width of your grid and your risk. How wide do you want your grid? Why? Have you calculated your drawdown risk?
5. Choose a direction. Will you trade the grid long, short, or bi-directional. Why? No, really. I am asking you to answer the question thoughtfully. Why? What are the benefits and drawbacks of your choice. "Because Mike/Jim/Bill/Clinton/whoever does it that way" is a lazy answer. You are not trading our money and we are not trading yours. Understand our reasons and then make your own choices.
6. Choose a duration. Is this a one week grid (grid scalping) or a long term plan? Again, support your choice with your logic.
7. Choose a hedging strategy. How do you plan to protect yourself in a drawdown situation? Those WILL happen. Will you use options? Stop orders? Shut down the grid on border violation? Counter-directional trades? You need to understand your alternatives and make a choice.
8. Run a demo. This takes TIME. That time should be weeks or months. Don't worry, the market will be there when you are ready. You did not just miss the last big move while you were learning. Don't be impatient. Another move will come when you are ready - really ready. I promise. You can trade this manually, or with robots like CheckGrid.
9. Analyze your results. You must demo trade through at least TWO major moves against you. You need to understand how you feel when the market decides to spank you hard. You need to understand how the strategy works under negative pressure.
10. Open a real money micro-account. Trade your strategy in the smallest order size possible. A penny-per-pip is good. I call this candy bar trading. A really good day should earn you enough for a candy bar. A disaster day should mean you don't get to buy that candy bar. Only when you are starting to worry about your waistline will it be time to move up to a larger account. Don't be impatient. If you are impatient, you will lose lots and lots and LOTS of money very, very fast.
I hope this helps clarify how to get started with checkgrid.
I have been asked where I found all this information on these strategies. I didn't. I learned the basic concepts regarding the grid, correlation, carry and news trades, then worked out the details for myself. I have not found this information presented in this manner anywhere else in any forum except for my posts in two forums. The brokers sure don't offer it.
So... on to the math. It really is math with variables and everything. Don't get scared. Again, I didn't find it somewhere. I wrote it out on a napkin while drinking a glass of beer or three. (If you are against beer drinking, please substitute the word "tea".)
SEGMENT SIZE
z = grid segment size. I break my grid into 100 pip sections.
GRID SIZE
t = grid width. How big is the whole grid?
STEP SIZE
w = step size. Are orders placed each 5 pips? 20 pips?
ORDER SIZE
a = order size. How large is each order? 10K? 1K?
PIP VALUE
b = currency value per pip.
LOT EXPOSURE PER SEGMENT
x = a * (z/w). This formula provides the total lots committed per segment size.
SEGMENT VALUE
y = z * b. This calculates how much gain/loss for when the market moves.
TOTAL GRID SEGMENTS
c = t/z. This calculates the number of grid segments.
DRAWDOWN RISK (x * y) * c(squared)
2 This calculates the actual drawdown in any grid size.
EXAMPLE
z = 100 (100 pip grid segment)
t = 300 (300 pip grid)
w= 5 (orders each 5 pips)
a = .05 (order size of 5K)
b = $10 (currency movement is $10 per pip)
x = a * (z/w) is x = .05 * (100/5). So x = 1 lot per 100 pips.
c = t/z is c = 300/100. So c = 3 or three segments.
y = z * b is y = 100 * $10. So y = $1000 which is the value of a 100 pip move.
((x * y) * c(squared)) / 2 is ((1 * $1000) * 9)/2. So in a three hundred pip negative move on a .05 order size, 5 step size, $10/pip currency set-up we would have $4,500 in drawdown.
HOMEWORK!
Calculate the maximum potential drawdown using a 10 pip step, .04 order size, 100 pip segment, 400 pip grid in the USDJPY. You will need to look up pip value for yourself. Email your answers to me if you wish. If you can't do this, don't trade a grid. You will get wiped out sooner or later.
Now take graph paper and plot the maximum drawdown at 100 pip intervals from 100 to 1000.
BTW, it is easier than you may think.
ADVANCED HOMEWORK (for those who are serious about making money)
Using .01 order size, 1 pip step, 1000 pip grid, 100 pip grid segment on the GBPUSD calculate the drawdown at 100 pip intervals between the prices of 1.8200 and 1.9200 for a bi-directional grid. Show the drawdown for both long and short, and combined drawdown assuming the price has touched both edges of this grid and is now somewhere in the middle.
Hint - this will graph as an inverted bell curve with total values of $50K at each end and $25K in the middle. Use a pencil and graph paper. Do not get lazy with a computer spreadsheet. This is something you should be able to do in your head.
So, this is kinda like asking for a drink of water and having someone turn on a firehose, huh?
BTW, if I screwed anything up blame it on the "tea" I was drinking...
A quick update - the CheckGrid EA is more than a simple grid robot. It has a nice hedging strategy built in to protect the account in strong market moves. During last week's large GBPUSD move it automatically protected the grid account from drawdown and booked a profit of around $7,000 on a $43,000 account, which more than compensated for the drawdown (which are not losses unless the trades are closed). Meanwhile the grid side of the robot just kept on grinding out the little profits.
It is a cool feature that would be good to take a look at. It is one way to hedge a grid.
I am usually reluctant to post a statement because I test my code in the demo account and that usually means trashing it with "bad trades" to test how the EA performs. It is very hard to see the performance through all of the noise of the testing trades, so I don't bother sharing it.
But, in the past couple weeks I've left the account alone (well, mostly) so it is fairly reflective of how it would perform. The gentle growth lines are the grid trades, and the spikes are the hedge protection trades kicking in. Their purpose is to compensate for any large moves away from the center of the grid and that worked very nicely this time. The market was very well behaved in it's move...
So, here is a statement of the past couple weeks for what it is worth. It shows how the EA handled a large one-directional move in the GBPUSD.
BTW, thanks for the questions. They keep me thinking and I've figured out a few adjustments to the system that will help. I'm working on something that modulates the sensitivity of the hedge trading during large drawdowns. That means I'm trashing the account again today... :-)
Hello Bill, I really like your correlator EA. I'm trying not to get used to it because I do not understand if it expire or not. Is this a commercial system or not?
I'm sorry that I am updating again so quickly. Briefly, I have upgraded the hedge lot size to a variable. This allows the user to change the hedge trade size as needed in relation to lots committed. The details are in the HedgeLotSize explanation of the FAQ.
Also, I added a small section in the Correlator FAQ explaining how trades can be added manually, and why this might be useful. I have not updated the Correlator itself.
So... everything is attached. I promise I won't update anything again for awhile.
Personally, I like a very wide grid with very low order sizes. I want the grid to run for a very long time (months!) and generate returns. Other's like a small one-directional grid with high leverage to jump in and out. This second technique works well if you know the direction of the market.
For example, I am currently running a GBPUSD two-directional grid from 1.93-1.93 (this can be adjusted to fit the market). I have .01 order size, 5 pip steps and 6 pip TP. I have $5,000 set aside to run this (real money in a live account) and am earning an average of $85/day or 170 pips in daily movement. Since it is a matter of scale, if I had $50,000 to commit I would earn around $850/day. I'm working towards that.... :-))
I have the automatic hedge trader set to kick in at $2,500. This is a little high for me, but I am not concerned about margin as this $5,000 is part of a larger account and is only internally allocated. The rest of the account is used for my correlation trade and some event trading. If the entire account was $5,000 I would set the hedge trader closer to $1,250.
The hedge trader uses the same currency in a counter-directional trade conditional on drawdown and pip movement. What that means is when you are close the the center of the grid, the price must move much farther for a given dollar amount, but at the edges a few hundred pips away it reaches that dollar amount in a much smaller pip move. To prevent the inverted pyramid problem as hedge trades are added faster and faster, both dollars and price movement can be used.
Drawdown math and homework
Linear Mode
