Quantitative Strategy Research Series 2 — The Grid Strategy

GAEA Investment Research Center — Greetings everyone, the following quantitative strategy research will cover the grid strategy. The two main themes in quantitative investment have always been its trend tracking strategies and mean regression strategies.

Under the same conditions, these two strategies will make diametrically opposite operations, thus creating a pattern that has its own advantages and complementing each other. The grid strategy which will be discussed in this article is related to the regression strategy. This type of strategy applies to shocks where prices are reciprocating in a relatively fixed range.

Grid Strategy Concept

There are many ways to implement the grid strategy, but it is essential to set a relatively stable policy, as long as the price fluctuations meet its conditions. For example, for every 5% drop in price, 20% is added to the total funds. This way, we can fully utilize the funds after a maximum of five times in policy change.

Similarly, for every 5% increase, we can lose 20% of the initial capital, and a clearance will be carried out after 5 times. Such is the basic idea of the grid strategy. Depending on the criteria by adding and subtracting warehouse conditions, we can derive a variety of grid strategies from a certain fixed percentage, fluctuations in certain prices, standard deviations, the average of real fluctuations, or by creating more complex adaptive strategies.

Let’s review about the Bitcoin’s market in the recent months. Some people may be concerned about the market, as the Bitcoin’s market has recently come out with a trend similar to the “door” or “anti-door” trend, which is when the price would suddenly rise sharply, then sideways for a certain period, and falls sharply; or in a reverse process. This market situation has caused negative effects to trend tracking investors. However, investors could still benefit immensely from this situation if the grid strategy is applied. We will present the data later in the backtest results.

Advantages and Disadvantages

After the explanation of using the grid strategy application, let us discuss the shortcomings of this strategy. There is no holy grail in quantifying trading strategies, as every existing market and strategy is flawed. First of all, in terms of grid strategy, its capital utilization rate is low and a large amount of funds are idle due to the limitation of position control. Therefore, this part of the funds can usually be considered as a capital preservation and investment, as it does not require high returns yet it is convenient for redemption.

Secondly, the grid strategy will suffer huge losses in a unilateral market, but we cannot predict whether it will enter the unilateral market. This extends to the third strategy, in a sense that the grid strategy is actually a strategy with limited benefits and huge risks. Of course, this does not defy the significance of the grid strategy, but it reminds us that the combination of research and development strategies are integral to strive for more stable returns. Moreover, this is relatively a complicated issue which is yet to be explained in this research.

Recent Market Backtest Results

The chart below shows the backtest results of the grid strategy. In order to highlight the effect of the grid strategy in the recent market, we specially selected the market in the closest month, with the hourly K-line as the cycle. Due to the recent volatility, we have chosen a relatively simple strategy of volatility and a certain price, that is, the strategy of adding and reducing positions. Considering that Bitcoin has fluctuated mainly around $7,000 recently, we have set the grid starting price to $7,000. Therefore, for every $100 lost, the amount is 10% of the total position, and the profit per order is $20. We backtested the hourly K-line of OKcoin on BTC from 0 point time on the 1st June to 31st July with such a simple model.

The trading point is as follows:

The net value curve is as follows:

The cumulative gain of this strategy is 35%, the annualized income is 410%, and the Sharpe ratio is 6.2, which works most strategically. It is likely that the time period selected by this backtest is suitable for the strategy, so we don’t have to pay too much attention to the results.

Backtesting Analysis

We would like to analyze the main reasons for profit and loss. The main reason of profit is that the grid width is relatively large, and at the same time it is more suitable for the current market. Therefore, in this substantial high low bargain-hunting process, we purchased a very favorable price and managed to make profit in a timely manner.

The loss occurred, and the purchase price did not fall sharply before the whole polishing process, hence, the net value decreased. It is worth noting that, fortunately, this decline is only 5,700, and it stays for a short period of time. If it unfortunately falls to 5,000 or lower, the current grid strategy will also suffer a greater loss. Therefore, this strategy does not guarantee stable returns, but is particularly suitable for shocks. In a closer look, it is essentially is nothing more than shorting volatility.

In addition, we have researched on the three parameters of this strategy: grid starting price, grid width, and its profit point. From the results, we believe that the starting price is set in the middle of the recent fluctuation range. The upper part is better; the grid width takes about one-tenth of the difference between the starting price and the previous low point. At the same time, the maximum is ten. This value is currently 100; and the profit point backtest is around 20 to 40. Both of the points can be profitable and there is not much difference, which indicates that it is relatively stable.

The grid strategy that we discussed today is just to provide the reader with an idea, and to remind everyone of the advantages and disadvantages of this strategy, and its scope of application.

If you liked this article, send us a clap below. If you would like to explore other trading strategies click here to see our last article on the Dual Thrust Strategy. Stay tuned for more articles!

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