Introducing the official WAARN Grid-Spot trading system for cryptocurrencies
UPDATE: 27 Sept 23
After much considerations on the current market outlook, we have decided to changed our business model to better adapt to this uncertain environment. We will no longer operate a trading bot.
Instead will be open-sourcing our trading tools (the non-proprietary ones), and transition into a community-driven platform business. If you are interested (early membership will be free as we build the platform together), please take a look here: https://waarn-finance.gitbook.io/waarns-philosophy/
UPDATE: 16 Nov 22
Due to recent events with FTX, we will move our operations to other exchanges once the dust settles. All trading activities and blogs will be paused until then. We apologize for any inconvenience.
In our other [article], we outlined the opportunities and risks of Grid Trading. And in this article, we will be introducing a Grid-Spot trading system developed by our team. We are opening this trading system to the public, to showcase our platform WAARN.finance, and as a way to build up our audience and show our analysis.
We encourage you to visit our other articles that will continuously update the setups for this trading strategy for free. You may also subscribe to our Medium channel, Twitter account, or Facebook page for real-time updates. We are also working on creating an automated tool for you to copy our setups for a small fee, so these articles can be your trial run to evaluate the effectiveness of the strategy.
Please note that in this article, we will assume you have some familiarity with how Grid Trading works already. If not, you can always visit our previous [article] for an introductory guide.
This article is split into the following sections:
Overview
Characteristics of a Grid-Spot strategy
Developing a trading system that takes advantage of Grid-Spot characteristics
How to implementing the Grid-Spot trading system
Expectation of results and Conclusion
Overview
The construction of this Grid-Spot trading system is relatively simple, the hard part will be the analysis to determine the configurations. In essence, we will be constructing 3 grid setups. Each setup will have an expected expiration period of 1 week, 1 month, and 3 months respectively. Here, an expiration period refers to the expected period where we expect the grid setup to either be profitable, or be in need of update. The grids will be deployed as follows:
Format: Expiration period | coin traded | portfolio allocation | name
1 week | SOL | 33% | short time-frame grid
1 month | ETH | 33% | medium time-frame grid
3 months | BTC | 33% | long time-frame grid
We will go through the whys in the next section, but there are 3 things worth noting here. First, each grid should correspond to a different coin than the other two. Second, the expiration date is not a hard outline, but a general guide, meaning it should be adjusted based on market conditions and price movements. Finally, each grid should have a roughly equal amount of money allocated into them.
Our expectation of positive returns is 1 year, with a maximum drawdown of no more than 20%. The actual returns will depend on the market as a whole since the spot market is naturally long-biased. We use this fact to our advantage.
Characteristics of a Grid-Spot strategy
Given how long Grid trading has been around for, it is unsurprising that there are dozens of variations. Of particular interest to us is the Grid-Spot strategy. It is useful to understand some of the characteristics of this variant of the grid strategy before we explain the logic behind the construction of our Grid-Spot trading system. These characteristics are:
1. Grid-Spot is long bias and only becomes profitable if there are upward fluctuations in price
Unlike a typical Neutral-Grid, where you gain and lose in both market directions, Grid-Spot only makes a profit where there is an upward movement at some point. This is because we will only sell when the price moves up a grid, and buy when price moves down a grid. It does not mean we cannot make profits if the asset declines in value over time, but that it will take more “cycles” of up-down price fluctuations and time to be able to turn a profit compared to a Neutral-Grid setup.
2. Grid-Spot takes advantage of ranging market conditions, but not as much as a Neutral-Grid
The grid strategy is generally famous for doing well in a ranging period. However, as Grid-Spot is long only, it cannot make money in down-only conditions. Because Grid Trading generally refers to the Neutral-Grid strategy that uses a long-short tactic (long when price moves down a grid, and short if price moves up), this characteristic is an important distinction. This means that if we deploy the two types of Grid Trading with the exact same boundaries, and the price moves in a range, a Neutral-Grid is likely to do better than a Grid-Spot over the long run due to its more leveraged nature.
3. Grid-Spot becomes profitable or unprofitable faster than a Neutral-Grid
This is because at the start of the Grid-Spot construction, we will need an inventory of the asset already on hand (whereas with a Neutral-Grid, you can start with no inventory), if the price moves down from our entry point, we are immediately unprofitable. On the flip-side, if the market moves upward directly after our entry point, we are instantly profitable, whereas a Neutral-Grid will take a couple of up-down cycles to become so. This works to our advantage especially in a bull market. It also mirrors traditional trading if we choose to exit the grid after a large up-move, making profit from the gains generated by the initial inventory instead of ranging price fluctuations.
To clarify, compared to a Neutral-Grid, Grid-Spot loses out when the market ranges (but still profitable), but wins out massively if the market moves up overall, and performs slightly worse if the market moves downward overall.
Compared to a traditional single trade (defined here as putting 100% of money into a single side of a trade), Grid-Spot performs slightly worse when the market moves up, loses less if the market moves down, and wins out if the market ranges. The degree of performance depends on the grid setup.
Developing a trading system that takes advantage of Grid-Spot strategy
Now that we understand the relevant characteristics of Grid-Spot, we will now walk through a few key factors that inform our trading system.
Factor 1: Risk Management
The first and most important factor is risk management. Because the strategy is long-biased, there is slightly higher risk of an asset going to zero, which is entirely possible (recall the Luna fiasco). To counter this, we decide that deploying multiple grids with different ranges is the most optimal tactic to manage unpredictable risks, without giving up on high profitability completely.
This technique to manage risk can be viewed as a “3 markets 3 time-frames” setup. This is our main differentiator compared to other Grid-Spot trading systems. We will be trading only BTC, ETH, and SOL, largely due to the availability of information on these coins (which help with our market prediction), but also because they are larger cap and therefore less susceptible to extreme price movement (relative to other assets in the crypto market). We also have faith that these 3 assets will grow over time.
BTC is allocated to the longest time-frame as it is the most predictable, as well as the least volatile, while SOL is allocated to the shortest time-frame for the opposite reasons.
Diving deeper into the logic behind this technique is our choice to separate the grids into 3 different timeframes. Recall that these time-frames correspond to 3 expiration periods (i.e. how long each grid setup is intended to last before renewing): 1 week for short; 1 month for medium; and 3 months for long. This decision is largely to do with price prediction accuracy and information availability, which we explain in more detail in this [article]. Additionally, there are a few other considerations that inform this separation, namely:
- Because Grid-Spot is naturally long-biased, we want to be able to handle large downward moves in the market beyond using a stop loss. Our long time-frame takes care of this, as we will almost always be bearish with our setup (details in the next section). Once the medium and short time-frame setups are stopped out, the long time-frame begins its accumulation phase.
- Our medium time-frame setup acts as our “always-on” strategy, whereby we will try not to close a position early unless the market meets our stop-loss/take-profit points. It will take advantage of a ranging market in the medium term, and we will be careful to set the boundaries in a range that price is likely to be fluctuating in that time period.
- Our short time-frame setup is the profit-driver. If we choose to only deploy ‘safe’ grids, our profitability will suffer, with long stretches of unprofitable periods. This grid is our more active high-risk setup. Note that we may occasionally skip this setup if the market is not favorable, or close a position early to capture profit opportunities / limit losses.
- The choice of time-frames is mostly informed by technical and macroeconomic factors. The medium time-frame lasts 1 month, as most derivatives expire on a rolling 30 days period. The long time-frame in turn lasts 3 months, corresponding to economic quarters. Finally, the short time-frame lasts 1 week in response to the stock-market opening and closing days. Note that we are assuming cross-correlations between the larger markets and cryptocurrency market, a relationship that generally shifts depending on macroeconomic conditions.
Factor 2: Money Management
We will use a simple diversification principle, where we are splitting the money into 3 equal amounts, 1 portion for each time-frame. This serves to limit potential ruin in a scenario where our short and medium time-frame grids produce a string of losses.
It is worth noting that Grid-Spot by itself, without our intervention, already has money-management built-in. We are simply adding an additional layer of risk management.
We will also apply a stop loss for every single grid construction. We strive to make sure that our medium and long time-frame grids would never be stopped out, but capital preservation comes first.
Factor 3: Market Prediction and Scenario building
To decide whether a grid should be closed and reopened with a different configuration depends on the market condition. We dive into the details of what information is needed to detect these market conditions and which information is suited to each grid time-frame in this [article].
It is important to evaluate whether our setup and analysis is valid or not, so we can choose to close a position and reopen it if the market is not moving the way we predict. Note that it is important to not overreact as there are costs to close a grid setup in the form of fees and slippage.
How to implementing this Grid-Spot trading system
Now that we understand the decisions behind deploying 3 grids at the same time, the next step is to construct the grids. If you follow the steps to acquire and analyze information from this [article], you should have in front of you a few scenarios backed by relevant information. Note that we are not trying to predict 100% what will happen, but we are trying to find the few most likely scenarios for different potential market conditions (e.g. bullish, bearish, ranging with high volatility, ranging with low volatility).
With that in mind, let’s look at how we will be constructing the grids.
Long time-frame grid
To construct this grid, we first choose how much risk we can tolerate based on the scenarios in front of us. Our long timeframe grid comes from an analysis with the most information, so we should have a pretty clear range with solid support/resistance.
We will almost always be choosing the potential bearish scenario for a long time-frame grid, as this serves as our hedge against the medium and short timeframe grids. While we will have the most information, we should also anticipate potential market crashes from [Blackswan Events].
We will likely be constructing a geometric grid up from the lowest price we believe the asset can drop to. We will also be closing and reopening the grid position every quarter. It’s vitally important to find a very strong support line in the daily graph. The purpose of this grid is more about capital preservation than profit-making, which only comes into play when the market is ranging in the long time-frame. It is not required to exit the grid after 3 months if the underlying analysis yields the same grid configurations (support/resistance level hasn’t changed and the strategy requires no rebalancing).
Medium time-frame grid
Moving on to the medium time-frame grid. It is designed to strike a balance between safety and profitability. We aim to be profitable about 8 out of 10 times. To make sure that we are within that goal, it is important to know when to close a grid. We will keep an eye on changes in Options open-interests, fundamental news, the economic calendar, and regulatory changes.
Ideally, we want to keep the grid going for 4 weeks, or get out as soon as the system nets us 5–10% profit. Having said that, we will need to manage potential losses, and if we are still not in profit by the end of the 4 weeks, we may choose to reconstruct the grid. Again, the default is to reopen the grid immediately after closing it.
Short time-frame grid
The key to short time-frames is emotional control. Short term predictability is prone to market manipulation and is sensitive to market shocks. Our predictions need to change constantly to reflect these effects. We will be quick to enter and exit, keeping the grid boundary tight during bears and generous during bulls.
We are likely looking at a profitability of 1–5% per grid setup, and a win-rate of around 60%. Note that this system relies on discretionary trading, and statistics is more of a guideline than a rule.
We also don’t want to reopen a grid setup immediately after closing. This is unlike the medium and long time-frame grids where we want to keep the grid running all the time. For this grid, if we expect high volatility, or a very likely bearish scenario, we may choose to skip a few days before re-entering our grid position.
Putting everything together
The final piece of the trading system is the deployment date. We rely mostly on our market analysis for this. To instantiate the trades, we hope to deploy all the grids at the same time, or at least within proximity of each other. Ideally, we will deploy after the effects of anticipatable news such as earning reports or Fed announcements have already been priced-in.
We then keep the long time-frame grid on a rigid schedule, re-evaluating quarterly. For the medium time-frame grid, we will try to do the same, but with more flexibility to respond to unexpected price movements. Finally, for the short-term grid, we re-evaluate daily, taking advantage of unusual up-moves and protecting against unexpected down-moves.
If we have to close a grid setup early, we always aim to reopen immediately, barring days where we may anticipate unusual market activities. This reopening should naturally conform to the expiry period of each time-frame (weekly, monthly, quarterly), but it could deviate by a few days depending on how we evaluate the market condition at the time.
Expectation of results and Conclusion
Grid trading’s purposes can be viewed in two ways: 1) as a way to make profit during a ranging market without constant monitoring; or 2) as a way to limit market risks by splitting up orders at multiple prices.
The first way reflects our short and medium time-frame grid, with the short time-frame grid being more aggressive and taking analysis inspiration from Scalping techniques. The second way is essentially our long time-frame grid, serving as a way to limit downside losses against potential crashes while still generating profitable trades if the market ranges.
Our aim is to create a Grid-based trading system that is both profitable but with downside protection. It is not meant to be always profitable, there may be stretches of unprofitable periods, but we expect that period to be less than 6 months. However, it is entirely possible this will not happen, and our technique may prove to only work in the current market condition. As this is discretionary trading, we also do not provide a backtest result, but will be publishing our live trading account results along with our trading decisions. This will exclude our previous results from testing this strategy for authenticity.
Finally, we are a company focused on bringing you cutting-edge cryptocurrency trading tools. You can check out our flagship product: the [pair-arbitrage] trading bot. More relevant to this article, in the near future we will create a ‘copy-trade’ automation tool that allows you to copy our in-house traders responsible for this trading system.
However, if you are willing to keep up with our articles and social media, we will be publishing the details of our trades publicly. The copy-trade is simply an automation service, but is not necessary to actually follow our trades (and which is why we won’t charge a performance fee, as we are live trading this in public anyway).
Also, if your exchange of choice does not have a Grid-Spot trading bot, we provide a completely free one at https://waarn.finance (note that this bot is not the whole trading system outlined in this article, our copy-trade automation is only available for premium-tier members).
We appreciate your time reading this article, and we hope you find it informative and potentially useful for your own trading journey.
WAARN Finance Quant Team
Disclaimer: Everything written in this article is not financial advice. You should consult with your financial advisor who understands your financial situation for any investment advice. We only aim to provide a framework for a variation of grid trading we have been using, which may or may not prove to work in the future. Your investment is entirely your own responsibility.
